Low savings account interest rates fuel a rush to liquid mutual funds

Net new account openings swell to 220,000 in 2025

With savings bank interest rates at historic lows, individual investor interest is picking up in liquid mutual funds (MFs), which delivered a consistent returns of 5-7 per cent annually. 

Such funds invest in highly liquid debt instruments having a maturity period of fewer than 91 days. 

These funds added more than 220,000 accounts in 2025 (till July 31) as against just 64,300 net additions in 2024 and 4,345 in 2023. In July, net addition was at a multi-year high of 108,500. 

The uptick comes after large commercial banks reduced interest rates on savings accounts following a reversal in the interest-rate cycle with the Reserve Bank of India (RBI) starting to cut the policy repo rate from February this year. 

Till now, the rate-setting panel of the RBI cut the policy repo rate by 100 basis points to 5.5 per cent. 

In response, banks, apart from reducing fixed-deposit rates, cut savings account interest rates. 

State Bank of India (SBI), the country’s largest lender, is offering 2.5 per cent on savings accounts from June 16 this year. 

In 2019, SBI was giving 3.5 per cent for up to ₹1 lakh in savings deposits, but the rate was reduced to 2.7 per cent in May 2020. 

Large private banks like ICICI Bank, HDFC Bank, and Axis Bank too have cut savings account rates. 

According to mutual-fund (MF) officials, the surge in accounts is largely due to the better return potential of liquid funds. 

“Investors now understand that liquid funds can give better returns than savings bank accounts. Also, with equity-market volatility, investors are increasingly using liquid funds to put money in equity funds in a staggered manner,” said D P Singh, deputy managing director and joint chief executive officer, SBI MF. 

Interest rates on savings accounts have plummeted to historic lows for most of the large banks after the series of policy 

repo rate cuts in 2025. 

The share of current and savings account (Casa) deposits of banks, which are low-cost deposits, has been falling for the past few years. 

Bankers say fixed deposits are growing at a faster pace than Casa deposits. 

“If people are interested in higher returns, they will divert their funds (from savings accounts) to fixed deposits. The amount they keep in savings accounts is to meet their monthly requirements,” K Satyanarayana Raju, managing director and chief executive officer, Canara Bank, told Business Standard. 

“I do not think the savings account rate is the main driver of funds shifting to mutual funds. Casa in absolute numbers is growing but it is lower than growth in term deposits,” he added. 

Liquid funds have recorded over ₹56,000 crore in the first seven months this calendar year. 

However, experts say the trend in account openings in liquid funds is a better gauge of retail-investor interest than net investment, which can be distorted by large institutional inflows and outflows. 

In June, institutional investors, including companies and banks, had over an 86 per cent share in the ₹5 trillion assets under management with liquid funds. 

High networth individuals (HNIs) (12.5 per cent) and retail investors (1.4 per cent) accounted for the rest. 

The MF industry classifies an account HNI if it receives over ₹2 lakh in one go. 

Liquid funds, among the lowest-risk MF offers, are considered an alternative to savings accounts to park idle cash. 

While liquid-fund returns are generally a notch higher than savings account interest rates, the difference becomes significant when the repo rate hits the lows. 

“Such funds have generally done well when compared to traditional short-term avenues across time frames. Currently, these funds are marginal as a portion of their investment allocation and there is merit for higher allocation by retail investors,” said Kaustubh Gupta, co-head, fixed income, Aditya Birla Sun Life AMC. 

Liquid funds have delivered average returns of 7 per cent in the one-year period. Yield-to-maturity, which is an indication 

of future returns, is at 5.7 per cent for liquid funds. 

Individual-investor interest in liquid funds had seen a similar pickup after the previous rate-cut cycle. The category added over 420,000 accounts in 2021, taking the total to 2.2 million. 

The present tally of 2 million is lower than the 2021 peak.