The bank saving account offers liquidity along with a reasonable rate of interest to accountholders. As a result, many people park their money as much as they can in their bank savings account; which they use to meet their regular household expenses and deal with financial emergencies.
However, wouldn’t it be good to have an investment option that not only offers the liquidity benefit, but also makes some returns as well?
With the growing popularity of mutual funds, liquid funds are emerging as a good alternative for surplus money. Not only these liquid funds offer better returns than saving theaccount, but they also come with a liquidity feature that makes them apt as an emergency fund option.
Overview of Liquid Funds
Also known as money market funds, liquid funds invest in short-term treasury bills, like a certificate of deposits, term deposits, and other short-term money market instruments where the returns are high as compared to bank saving accounts. These funds belong to debt funds category where the investments are made in assets with maturity up to 91 days. Further, within 24 hours, money can be redeemed.
You can choose from a wide range of liquid funds offered by different fund house, which come without entry or exit load. Also, the management fee is much lower than the equity or debt funds. They also come with different investment options like growth, daily, weekly, monthly dividend.
Just as you do with any other mutual fund, you can either make a lumpsum investment or invest in liquid funds through SIP (Systematic Investment Plan) as well.
Returns from Liquid Funds
Liquid funds are one of the best investment options for the short-term needs. Over the last few years, liquid funds have given better returns than bank fixed deposits, which levy a penalty on premature withdrawal.
In 2016, liquid funds offered the following returns:
Source: BankBazaar and Value Research
Though, the interest rate of liquid funds varies over time, as per the market, it is higher than what is offered by a saving account.
How Are Liquid Funds Taxed?
In the case of saving the account, the tax deduction up to Rs 10,000 is available on interest earned on a savings account. The interest earned over and above this limit is taxed accordingly as per the income tax slab.
In case of liquid funds, a resident individual investor doesn’t need to pay taxes on the dividend received under liquid funds. However, fund houses pay distribution tax. Also,individual investors who earn profits within a year of making the investments also must pay tax as per their income slabs. Along with this, interest earned from savings accounts are taxed as per their income slabs. In case, investors redeem liquid fund units after a year, they must pay a long-term capital gain tax.
How to Choose the Right Liquid Fund?
While choosing a liquid fund, the past returns should not be the sole factor. There are other factors like the track record of the fund house, size of the fund, etc.; that should also be considered while choosing the liquid fund.
Indeed, theliquid fund is a suitable short-term investment option for those who want to invest for a few months only. For instance, if you have Rs 2 lakh and you want to purchase something after four months, you might be interested in putting your money in a liquid fund instead of bank deposits as returns are relatively high. At the time of need, you can easily withdraw the amount as well. Unlike, bank saving account, liquid funds also keep your money safe from the impulsive spending.
So, it’s a right time to say, ‘Hi to Liquid Funds and Bye to Bank SavingsAccount.’