SOLID GAINS

LIQUID FUNDS AND ARBITRAGE FUNDS ARE COMPELLING ALTERNATIVES TO TRADITIONAL SAVINGS ACCOUNTS

- NACHIKET KELKAR

In 2025, the Reserve Bank of India reduced its benchmark repo rate—the rate at which it lends to commercial banks—by 100 basis points, from 6.50 per cent to 5.50 per cent. This move benefits borrowers by lowering borrowing costs but poses challenges for savers, as banks have started reducing interest rates on deposits.

India's largest lender, State Bank of India, now offers 2.5 per cent interest on savings account balances. Private sector banks like HDFC Bank and ICICI Bank have followed suit, also cutting savings account rates to 2.5 per cent. This trend extends across public and private banks, with fixed deposit rates also declining in response to the RBI's policy.

For savers, this raises a critical question: where can surplus funds, especially for short-term needs or emergencies, be parked to achieve better returns? Liquid funds and arbitrage funds emerge as compelling alternatives to traditional savings accounts.

Liquid funds, a category of debt mutual funds, invest in short-term fixed-income instruments such as government securities, treasury bills, and commercial papers, typically maturing within 91 days. This short duration minimises interest rate risk, while fund managers prioritise top-rated securities to reduce default risk.

Key advantages of liquid funds include:

High liquidity: No exit loads, with many fund houses offering instant redemption, allowing funds to be transferred to your bank account almost immediately.