Today every one of us atleast have one saving or salary account which we use to keep our earnings safe. At the beginning of the month our salary gets credited into this account, after paying all the monthly expenses like bills, EMIs etc. we left with some cash balance. Some of us use this saving account for the purpose of investment where we left our cash balance in the same account to enjoy safety, liquidity and reasonable returns.
Not all us do the same, as there are ‘n’ number of ways to invest money. One of the most popular way of investment in banks is Fixed Deposit where you can lock your cash for a fixed period of time to get better returns as compare to saving account. This offers safety and good returns on the amount invested but on the cost of liquidity loss. As Fixed Deposit as name suggest will lock the cash invested for a fix time period. Although you can withdraw your cash anytime but by paying penalty for early withdrawal. Secondly the returns on FDs gets clubbed to the income of the investor and become taxable under income tax law as per your income slab which can go upto 30%.
Some investors like to put there money into stock markets or equity mutual funds to get higher returns on there investments. But for a short period (typically less than 3 years), the equity or stock markets can be quite risky and unreliable in terms of returns.
So here comes the time to look for an alternative which can offers us the benefits of all three investment options i.e safety, liquidity and higher returns.
Liquid Mutual Funds, as name suggest these are mutual funds which offers liquidity to the investors. In other words, it is one form of investment which offers liquidity plus good returns at the same time.
Here are the basic features of liquid mutual funds
- Open ended debt mutual funds.
- Maturity Period :- Amount invested in liquid funds are further invested in short term securities typically with the maturity period between 15 to 90 days.
- Less Prone To Market Risk :- Liquid mutual fund investments are short term investments which is less prone to changes in the market conditions i.e changes in interest rate etc. which makes it the least risky instrument.
- Easily Redeemable :- These funds are also called as cash funds as redemption of funds (conversion from fund unit to cash) can be done anytime i.e conversion happens within 24 hours of submission of withdrawal request.
- Zero Entry & Exit Load :- Unlike other securities, you can redeem units of liquid mutual funds anytime without paying any charges i.e exit load.
- Offers good post tax returns :- Investment in liquid mutual funds generates better returns as compare to saving bank accounts.
- Minimum Investment :- Investment in liquid mutual funds can be started with the minimum investment of Rs 1000 to 5,000.
- Portfolio :- The portfolio allocation of these funds is designed to invest the entire amount i.e 100% in money market instruments, in which a large portion being invested in call money market.
- Attracts less taxes
Liquid Funds Vs Liquid Plus Funds
Liquid Plus Funds
|Short term Investments for as short as one day to91 days.||Investments for a longer period as compare to liquid funds i.e. more than 91 days|
|No Exit Load At all||Some Funds Have Exit Load|
|Less tax efficient – Dividend distribution tax of 28.33% is charged on liquid mutual funds for individuals.||More Tax Efficient – Dividend Distribution tax of 14.16% is charged on liquid plus funds for individuals.|
|Less Risky||Risky as compare to liquid mutual funds|
|No Entry Or Exit Load||Some Funds Have Exit load|
|Liquid Mutual Funds Are Quite Safe||Liquid Plus Funds are little riskier|
Liquid Funds Vs Saving Accounts
- Saving Account :- You can earn annual return on your investment i.e around 3 to 4 percent (During normal market conditions).
- Liquid Funds :- You can earn little higher returns on your investment i.e on an average of 5 to 6 percent post tax return.
- Saving Account :- No bank allowed you to open a saving account for a single day
- Liquid Funds :- In liquid funds you can invest your funds for as short a period as one day to 3 months.
- Saving Account :- Funds remains idle in the bank account.
- Liquid Funds :- As per SEBI liquid funds can be redeemed within 24 hours from applying for the redemptions which offers easy liquidity.
Tax Deduction At Source (TDS)
- Saving Account :-
- Bank Deposits returns i.e interest is taxable upto 30% as per income tax act.
- Liquid Funds :-
- Dividends are exempt from tax.
- Liquid funds are taxable upto 25% + 7.5% surcharge + 3% education cess which comes to effectively 27.68%.
- Saving Account :- Funds deposited will remain idle in the bank account.
- Liquid Funds :- Funds invested by you will be invested in money market instruments, such as commercial paper (CP), certificate of deposits (COD), treasury bills (t-bills) and call money market.
- Saving Account :- Funds remain idle in the bank account.
- Liquid Funds :-
- SEBI regulates these funds.
- These funds can only be deployed in short term government securities not in risky equities.
CONCLUSION:- When bank saving account rates are lower than it is always better to invest in liquid funds as liquid funds offers you all you need i.e safety, liquidity and higher returns. Currently banks are offering attractive interest rates, so it may not proved to be very beneficial but when bank interest rates will go down you will be able to generate almost double the returns.