Mutual Funds vs Savings Account — The Money That Just Sits

Money in it is available immediately, at a known amount, with no process. Nothing else in this discussion matches that, and it is not a small advantage.

The balance also never falls, which matters more psychologically than people admit. There is no bad month, no red number, nothing to sit through.

For the money that pays this month bills, and for a portion of the household buffer, it is the correct place and we would not suggest moving it. Our page on building an emergency fund covers how much genuinely needs to be that reachable.

Nobody decides to keep a large balance. It happens in a particular way that we see repeatedly.

A bonus arrives and is not allocated. A maturity is credited and stays. Money is kept back for a purchase that gets postponed. Each amount is there for a sensible reason at the time, and none of them is ever reviewed. Three years later the account holds several months of income doing nothing in particular.

The reason it persists is that nothing about it ever looks wrong. There is no month where a statement flags it, which is exactly the problem our page on inflation and your savings describes.

So the useful exercise is not comparing products. It is looking at the balance and asking how much of it has a job.

Not one thing, which is where the comparison usually goes wrong.

Somebody who moves idle savings into an equity scheme has not solved the problem, they have swapped a slow certain erosion for the possibility of needing the money in a bad month. That is a worse arrangement for money with no date attached.

What the category actually offers is a range. A liquid scheme sits close to a savings account in availability and is built for exactly this kind of money, as our page on liquid funds covers. Equity sits at the other end and is for money that will not be touched for years, as our page on asset allocation sets out.

The right answer for an idle balance is usually the first, not the second. That is a duller recommendation than most people expect from a distributor and it is the one we give most often.

Four things separate them in daily use, beyond the obvious.

• Timing. A savings account is instant. A redemption takes a few working days for most categories and a shorter cycle for liquid schemes, and our page on the cut-off time explains why.
• Certainty of amount. A savings balance is the balance. Any scheme value can move, even a low-risk one, though the movement in a liquid scheme is small.
• Friction, which cuts both ways. Money that takes two days to reach you is money you are less likely to spend impulsively.
• Tax treatment differs on both sides and depends on your situation. We are distributors and not tax advisers, and our page on mutual fund taxation covers the structure.

Many banks offer an arrangement where a balance above a set level is automatically moved into a deposit and pulled back when you need it. It is worth knowing about because it sits exactly in this discussion.

What it does well is remove the decision. Money above your chosen threshold stops sitting idle without you having to do anything, and it comes back when a payment needs it.

The limitations are worth knowing too. The threshold is usually set once and then never revisited, so a level chosen five years ago may bear no relation to your current balance. And it applies only to that account, so money sitting in a second bank is untouched by it.

For a household that will genuinely never review the balance, it is better than nothing and we would not talk anybody out of it. For one that is willing to sort the balance deliberately once a year, the exercise below is more useful, because it distinguishes between money with a job and money without one.

Take the account balance and split it into three, which takes ten minutes and settles most of this.

This month. Bills, instalments, ordinary spending. Stays exactly where it is.

The buffer. Several months of household costs, which needs to be reachable but not necessarily instant. Part can sit in the account and part somewhere marginally less immediate.

Everything else. Money with no job and no date. This is the portion worth deciding about, and the decision depends on when you might actually need it rather than on what any product promises.

Most households find the third pile is larger than they expected. That is the finding, and it is worth more than any comparison of features.

Not moving everything, and not moving anything into equity because the balance looked large.

Keep the first two piles where they are or close to it. For the third, decide a date. If there genuinely is not one, that money can take a longer horizon and should be treated accordingly. If there might be one within a couple of years, it belongs somewhere stable rather than in a market-linked holding.

If the exercise shows there is regular surplus arriving each month as well as an accumulated balance, that is a separate decision and our page on how much to invest works through it.

And if you would rather leave it all in the account, that is a legitimate choice made with the facts in front of you, which is different from leaving it there because nobody ever looked. We would rather that than a change made because somebody made you feel behind. To go through the split with somebody, get in touch, and mutual funds versus fixed deposits covers the other place this money commonly sits.