in Finance, Investment, Mutual Funds

Don’t leave your money idle in savings account.

Most of us do have one or more savings bank account or a salary account in which our salary gets credited every month. After all of our monthly expenses like house rent, bills, EMIs etc, we are left with liquid money (disposable) also famous as Monthly Savings. Some of us invest in equity mutual funds, FDs or share market. Most of the people due to their ignorance or laziness, leave the money accumulating in their accounts every month.

They are also unaware that the bank give them only 3.5 to 5% rate of interest, that too on the minimum balance between 10th of month and last day of month. I am sure all of us must have read this in our high school mathematics. So If you put 50k in your account on 15th and you had 10k in your account on 10th, you will get interest only on 10k and not on 60k. Also even this small money earned is taxable up to even 30 per cent. Keeping in mind the inflation rate, this gives you negative return on your hard earned money.

Some better financially educated people, put their money in FDs. But that too have some disadvantages. One, fixed deposits are not very liquid. The investor cannot withdraw his money during the term of his deposit. In case he wants to make pre-mature withdrawal he has to pay a penalty.  Secondly, investor has to pay income tax upto 30% on the return.


Some invest into Share markets or equity mutual funds, But considering the current market situation, its not advisable to do that.

So now question is where we should keep our hard earned money ??

There is a great option to put your money into and have liquidity as well as earn good returns too also. Best choice is a liquid mutual fund.
Liquid mutual funds are open ended debt mutual funds. There is zero entry or exit load. They are safe options as they are not invested into equity or markets. These are best place to invest for short periods of time (even for 1-2 days). Also they give better returns than FDs and savings bank account.

Whenever, you need money back, just redeem the funds and amount will be back in your account in max 2 business days.

How much income tax one need to pay on returns from liquid mutual fund: In case of a liquid fund with dividend option, dividends declared by mutual funds units are exempt from tax in the hands of recipients. Dividend distribution tax of 22.06% is paid by the fund and is adjusted in the net asset value (NAV) of fund.

Some best performing Liquid mutual fund:
HDFC Liquid Fund – Growth
Birla Cash Plus – Retail – Growth
HDFC Cash Management Fund – Saving Plus – Growth
Magnum Insta Cash Fund Liquid Floater Plan – Growth
HDFC Cash Management Fund-Savings-Growth

There are two types of these short terms debt funds available, Liquid and Liquid Plus.
Now question come to mind, how they differ and when to invest in which one.
liquid plus funds holds investments for a longer period than liquid funds. So people investing in liquid plus should hold for longer duration than liquid ones. Investors who need liquidity should go for liquid funds.
Some of the liquid plus funds may have an exit load. But there is no entryload on liquid funds.
Liquid Plus funds are a bit riskier than liquid funds as they hold investments for a longer duration and also there is no limit on market-to-market components but liquid funds have 10% limit on it.
A dividend distribution tax of 28.33% is charged on liquid funds, whereas 14.16% is charged for liquid plus funds.

So next time, your salary comes to your account, Just keep your monthly expenses and transfer rest of the amount into the liquid mutual funds.

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  1. Hi Pankaj,

    Please suggest some good liquid fund plan.I can invest monthly 10K.

    • @Koushik
      If you don’t need this amount for a longer period (> 3 months), its better if you can invest into Fixed maturity plans (FMP). At this time, they can give around 9-10% annual return.

      For liquid funds, you can choose from:
      HDFC Cash mgmt fund savings plan, Magnum InstaCash Liquid Floater-G, JM High Liquidity Reg-G, BSL Floating Rate ST-G, , Principal Cash Mgmt-G, Magnum InstaCash (Cash), ICICI Pru Liquid Inst I-G or
      Birla Sun Life Savings Fund – Retail Plan – Growth.

      • Hi Pankaj,

        I was planning to invest in FMP. There were couple of FMPs I came across
        – Reliance Fixed Horizon Fund – XIX – Series 21 – 727 days
        – HDFC FMP 370 days
        – There could be more.

        Any guidance how to choose an FMP?
        Is interest on it tax free?


        • @Kiran
          As FMPs are closed funds, they don’t have any past scheme records to compare them.
          You can invest into a reputed company FD (HDFC, Reliance, Franklin etc) based on tenure you need.

          Returns are not tax free. Short term gains (holding period less than a year) will be added to your taxable income and will be taxed as per your slab rates.
          Long term gains (holding period more than a year) are taxed at 10% flat rate, or 20% with indexation benefit.

      • I am in max tax bracket . I have a choice to invest in bank FD or short term liguid mutual fund. What would you suggest one should opt for especially in the current uncertain financial market position ? As I understand , tax will be levied at 30% for gains under both investments .

        • @Anil
          Both fixed deposit and liquid mutual funds are safe option as none of these invests in equity markets.
          If you are looking for investment for more than an year, consider Fixed Maturity plan (FMP) mutual funds. they have better taxation than fixed deposits.
          For period less than a year, fixed deposit, fixed maturity plans and liquid mutual funds will have maximum 30% (depending on slab rate) income tax on gains. For more than a year, FMP and liquid mutual funds will attract 10% income tax or 20% after indexation benefit.
          Liquid mutual funds are good for short term (less than three months) as they can generate better returns than fixed deposits and saving bank accounts.

  2. I am from Chandigarh. As you said, my money is leeft with liquid money (disposable) also famous as Monthly Savings. So, now I want to invest in Mutual Fund but the problem is that I have no knowledge about them. Kindly adcise me to build my portfolio that whether I should go for a SIP or in gold ETFs which are in high demand these days.

  3. Hi Pankaj,

    Yes off course,i am having some idle funds in my saving account ..approx 45,000 average at a lower side . I wanted to create some good returns out of it. Pls suggest what should i do ?

    But it should be short term say 3-5 months.

    Thanks Deepak

    • @Deepak
      You can put this extra amount into Liquid mutual funds or short term Fixed maturity plans (FMP) mutual funds.

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