One of the first thing we Indians like to do when an individual turns 18 years of age, is to not to get a voter ID card made but to run to the nearest bank and open a savings bank account. Call it mental conditioning thanks to the pattern used by the elders for savings or our subconscious love for money safe keeping, we all like to see a heap of money carefully saved in a savings bank account.
This money saved is typically to meet our day-to-day expenses, or be a source of ready cash when in times of emergency or plainly for the proverbial rainy day. The interest rate on Savings bank accounts was 4% p.a. till RBI de-regulated it in 2011. The current interest rate ranges between 4-6% p.a., depending on the bank you choose to associate with.
However, what is not very popular is the existence of a similar savings account offered by Mutual Fund companies which acts like a bank account and is also similar on safety parameters. With all things being similar, what makes this type of savings account attractive is the return offered by such a fund. Such accounts go by the name – Liquid Fund, and are offered by all the mutual fund companies.
This type of fund is typically an open-ended debt scheme which invests in short term money market instruments such as treasury bills, short term corporate paper etc., maturing within 91 days. Here, an investor has the option to park one’s fund for a few days or months and earn returns for the holding period as per market rates. Also, there is no exit load applicable for such a fund. Liquid funds are available in various variants such as Daily Dividend, Weekly/Monthly Dividend and Growth option.
These funds generally have a very high quality and short maturity portfolio, leading to steady returns even over short time periods. These funds also allow investors to redeem any part or the entire investment at a day’s notice.
They are managed by expert fund managers who actively try to manage the portfolio based on interest rate movements, while at the same time keeping the portfolio credit worthy.
The answer to this question is simple. Higher returns.
On an average over the last one year, the best of the liquid fund has provided returns in the range of 7-8%, on an annualised basis. This is notably higher than 4-6% which is offered by a savings bank account. For someone who wants to maintain a steady flow of cash, one can opt for dividends which will be credited on a daily, weekly or monthly basis. But one has to aware of the taxation of such dividends and invest in the appropriate option.
Liquid Funds have the advantage of tax-efficient returns when compared to savings bank account. Here, the long-term capital gains are taxed at 20% after indexation, while short term capital gains are added to your income and taxed at the marginal rate applicable to you. Hence these funds offer a significant benefit for those in the higher tax brackets.
Based on Valueresearchonline.com as on 27th October 2016, average historical returns of Liquid funds are as follows: 1 year (7.66%), 3 year (8.40%), 5 year (8.67%) and 7 year (8.04%).
Often, individuals maintain contingency fund in a savings bank account or fixed deposit, such that it is easily reachable and can be liquidated when needed. However, financial planners are of the view that ideally funds allocated to meet contingency requirements should be kept in a liquid fund rather than a bank account or an FD. They site twin benefits of such action. First being – earning more than savings account and the second being the absence of exit load. Added benefit of taxation is also available for investors in the higher tax brackets.
When it comes to redemption, the investor can simply place a redemption request and the money accumulated gets credited to one’s bank account the very next working day. However, in reality, this one day gap can be quiet a concern for several individuals. So credit cards could be used to tide over this gap.
MF companies are rolling out innovative options to reduce the 1 day needed to redeem the Liquid fund investments. Take the example of Reliance MF. It has introduced an instant redemption option through an ATM card (takes upto 30 minutes) from its Reliance Money Manager Fund. While there is a maximum amount that can be redeemed through this route (upto Rs.2 lakhs or 95% of investment value), it can definitely ease the concern of a day’s gap in redeeming the investments during an emergency. DSP BlackRock MF has also introduced an instant redemption option from its DSP BlackRock Money Manager Fund. This makes your Liquid fund investment accessible 24×7, better than the FD with a bank which can be redeemed only on a working day.
This new redemption facility should definitely tilt the scales in favour of liquid funds and help investors earn more from their emergency / surplus funds.