Savings Account VS Mutual Funds
One should keep 2-3 month's expenses in the savings bank account. Further 3-6 months regular
expenses should be invested in a liquid mutual fund. Anything more than this in the savings bank is an
opportunity cost, loss of interest income, and negative returns; if inflation-adjusted returns are
considered.
Dividends are Tax free
long-term capital gains tax - 11.33% (including cess and surcharge) or 22.66% with indexation benefit, whichever is
lower
| Factor | Saving Account | Liquid Mutual Fund |
|---|---|---|
| Typical Returns | 4-6% | 6-7% |
| Tax (Most Important)* | As Per Tax Slab | 0% after 3 yrs |
| Lockin Period | NIL | NIL |
| Entry Load and Exit Load | NIL | NIL |
| Compounding | Quarterly | Daily |
| Typical Net Return (Post Taxes & Penalties) | 3% | 6-7% |
| Risk Factor | Low | Low |
*Savings account can attract a tax rate as high as 30% depending on your personal tax rate. Debt Mutual Funds have lesser than 5% tax if held for more than three years and same Arbitrage funds have zero tax