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Liquid funds help earn more than inflation rate and have a high liquidity.

A large section of people in India park their personal money in either savings bank accounts that earn a low rate of interest or business funds in current account that pays nil interest. This rate, most of the time, is much less than the rate of inflation. In the mutual fund space, there is an alternative which gives a much higher return, with safety and liquidity nearly on par with savings bank accounts. These are Liquid Funds.

Liquid funds mainly invest in money market instruments that include treasury bills, certificates of deposit, commercial papers, etc. and their residual maturity is never more than 91 days. These schemes are mainly used to park short-term funds when their utilization time is uncertain. One can park money in these funds in bulk or in as many tranches as required.

With the current interest rates trending lower and lower due to witnessing lower inflation, the smarter way to achieve better returns than savings bank or current account will be investing in liquid funds. More over the interest from SB account is taxable.

If one decides to opt for the dividend option in a liquid fund after paying a dividend distribution tax of nearly 29%, the investor can get approximately 4% to 6% tax-free dividend in hand. "This becomes even more attractive compared to keeping money in a current account in which the account holder does not get any interest,". Moreover, liquid funds are taxed like any other debt fund. When profits are realized in less than three years, the same are taxed as per your tax rate, while the profits realized after three years are taxed at 20 per cent with indexation. Investors who come in the 30 per cent tax bracket can opt for a dividend payout if they require cash on a regular basis.

For corporates, this liquid fund offers some extra money without taking much risk. If you have some payment scheduled after 10-15 days, instead of keeping money in a current account which earns zero income, you can keep it in liquid funds to earn interest. "Also, there`s safety in liquid funds since these schemes mostly invest in `AAA`-rated instruments and government-based papers,".

Transacting in Liquid Funds

It has become a lot easier with technology playing a key role in banking and also in mutual fund transactions, an investor willing to redeem his holdings can get the money on the next working day, which in industry parlance is called on a T+1 basis, that is, transaction day plus one day. Usually, if a person send redemption request before 3 pm on a business day, the money will be credited to your bank account the next day, If the request is sent after 3 pm, it will be credited to your bank account on the third business day.

So, people used to keep their money in savings banks or current accounts can do a bit of a planning about their funds requirement and keep their money in liquid funds to earn higher returns.

However, in case the rate of interest in the market falls, which many expect, then returns from liquid funds could also come down gradually. On the other hand, in case the rate of interest in the market goes up, returns from liquid funds will also go up.

Liquid funds belong to a category of mutual fund schemes which invest primarily in money market instruments with a residual maturity of up to 91 days. These schemes seek reasonable returns, commensurate with very low risk levels and, at the same time, come with an elevated level of liquidity.

Here, investors can invest their money even for a single day. Further, they can invest additional money or redeem any amount whenever they want. These schemes are an useful tool to beat SB & current accounts and FDs in terms of returns.

“Mutual Fund Investments are subject to market risks, read all scheme related documents carefully”

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