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Most of us tend to have money lying idle in our savings bank account. We keep money in our savings bank account because we can draw it at any time using debit card or use it to pay utility bills, credit card bills and other expenses. However, there is an opportunity cost of keeping large sums of money in our savings bank account. Most banks pay 3.50-4% interest on balances in savings bank account. On a post- tax basis, the interest earned on savings bank deposit is lower than the inflation rate.

Therefore, while savings back offers the convenience of “any time money”, your money is unproductive, when it is lying in your savings bank account. Money market mutual funds like liquid funds and ultra-short term debt funds offer convenience, liquidity andhigh degree of safety, yet much better returns than savings account, for money that you may not need for a few days, few weeks or few months.

What are liquid funds?

Liquid funds are low risk mutual funds which are suitable for parking funds for very short durations ranging from a few days to a few months. Liquid fund invest primarily in money market instruments like treasury bills, certificate of deposits, commercial papers, treasury bills etc.,that have a residual maturity of less than or equal to 91 days, with the objective of providing investors an opportunity to earn more returns on very short term deposits (compared to savings bank or current bank accounts), without compromising on the liquidity of the investment.

As the name suggests, these funds offer very high liquidity. There is no exit load; you can draw your money at any time, partially or fully, without any penalty or charges. Withdrawals from liquid funds are processed within 24 hours on business days. Liquid fund invest in money market instruments with residual maturities of 3 months or less. Interest rate risk is very low for such short maturity instruments. As a result liquid funds are able to generate stable returns with high degree of safety.

Benefits of liquid funds

  • Better yields on your idle money: Liquid funds can give 2 – 4% higher returns than savings bank accounts. They are ideal solutions for accruing stable income from your idle funds. If you have on an average a balance of Rs 1 Lakh in your savings bank account, by investing it in liquid funds, you can get Rs 2,000 to Rs 4,000 higher income in a year. To some investors, this may not seem a big amount, but if you make parking your surplus (which you do not need immediately) money in liquid funds a habit then over a long period of time, you will see substantial financial benefits due to compounding of accrued returns.

    From time to time, you receive large one-time cash-flows like bonus, investment maturity proceeds (e.g. FD, PPF, life insurance policies etc.). These monies tend to lie idle (unproductive) in your savings bank accounts for long periods of time, till you find a use for it. By investing them in liquid funds, you can generate substantial income for yourself, without compromising on liquidity for end use of the funds.

    See the trailing returns of liquid mutual funds in India over different time periods
  • Liquidity and convenience: Some may say that return is not the primary objective of the money lying in your savings bank account. Savings bank offers the convenience of drawing your money at any time from an ATM using your debit card or using your debit card for shopping at any establishment. Liquid funds also offer very high liquidity. As discussed earlier, redemptions are processed within 24 hours on business days and there is no exit load.

    In fact, some liquid fund schemes offerinstant redemptions. Redemptions made through the AMC desktop portal or mobile appin such schemes gets credited to your savings bank account within just a few minutes. So if you suddenly need money and you have the transaction app installed on phone, you can put in the redemption instruction through your phone app from anywhere you are and the money will get credited to your savings bank account in just a few minutes.
  • High degree of safety: Liquid funds are money market instruments – they do give assured returns. Liquid fund returns depend on prevailing money market rates. Money market rates change with changes in interest rates in the economy. However, since liquid funds invest in very short maturity instruments, the price sensitivity of these instruments to interest rate over the maturity term is extremely low. It is extremely rare for the NAV of a liquid fund to fall – in the last 10 years or so, liquid funds gave negative daily returns only for 4 – 5 days, that too in extraordinary circumstances when the US Federal Reserve announced tapering of their Quantitative Easing program. Liquid funds offer high degree of safety and income stability.
  • Tax efficiency: Unlike savings bank account, there is no Tax Deducted at Source(TDS) on returns accrued in the liquid funds (for resident investors only). Profits or capital gains in liquid fund investments held for less than 3 years are taxed as per the income tax slab of the investor. Though liquid funds are meant for very short term investments, from a few days to a few months, there can be situations when you can hold your liquid fund investments for a long time. Capital gains in liquid fund investments held for more than 3 years are taxed at 20% after allowing for indexation benefits. Indexation benefits reduce the tax-payers obligations substantially.

Top Liquid mutual funds

We have done a comprehensive analysis of the performance of liquid mutual funds based on their returns over the past 1 year, their performance consistency over 5 years and minimum AUM criteria. Below is the list of some of the best liquid mutual funds listed in alphabetical order – all these funds are highly rated by the mutual fund research firms too.

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How to invest in Liquid Funds

Investing in liquid funds is very simple. If you are KYC compliant, you can invest in liquid funds by filling up an application form where you provide personal, investment and bank details. Our relationship managers / AMFI Certified MF advisors will guide you through the process and it will take only a few minutes of your time. Our team will also guide you with the best scheme selection. If you are not KYC compliant, then our relationship managers will work with you to provide the necessary documents to the relevant Registrar / Transfer Agents (RTAs) or AMCs to get your KYC done. If you want to avail the instant redemption facility, our team will guide you on how to avail the facility. Again the process is quite simple.

Conclusion

Liquid mutual funds can help investors make their idle money work instead of keeping them in savings bank accounts. Liquid funds are ideal for parking funds for a period of few days, few weeks or few months. Liquid fund is the best investment choice for money that investors may need to use at a very short notice. If you want to know more about liquid funds, please contact us lordscal@easternfin.com

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