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:
LIC LIQUID FUND – GROWTH PLAN
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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Please be noted, govt. has ordered to calculate the interest daily basis.
Can you please explain in detail about the returns from Liquid Funds and how they are better investment option. Thanks for promoting my posts.
@Saraswathan
Liquid fund's return is interest rates dependant. Currently they are giving around 6% return, which is better than what you get from keeping money in saving bank account.
Investment liquid fund is better than saving bank. If you don't need this money in near future (next 6-7 months), there are better options to keep money like company Fixed deposits, Bank Fixed deposits etc.
That was a useful post. though I don't understand finance, I can see that money lying idle is a waste. So now I will bug someone who can help me out!
Thanks for adding me to your network. I will add you:)
what are the best performing Liquid mutual fund currently. pls advice.
@Palrakesh
You can invest in LIC Liquid fund or HDFC Cash management fund.
Dear Pankaj,
Can you suggest any sites where we can compare performance of Liquid funds vis a vis some Bench Mark and what is that Bench Mark?
Also e.g. if I invest 1 Lakh Rupees in liquid fund for a month. calculating @6% return, I will get return of Rupees 500 where as my Salary Account will provide half of that. So the difference will be Rupees 250. Is this amount worth the trouble? I can operate my salary account from Netbanking as well as Mobile banking, ATM etc. Same is not the case with Liquid funds.
I think it is good for individual or corporate with huge surplus cash. Please comment.
Thank you in advance.
Purshottam
@Purshottam
You can compare funds on MoneyControl and ValueResearchOnline.
You must keep some amount in your savings account for immediate emergency (say 40-50K).
Apart from that can be put in liquid funds. There is no trouble and Redemption is easy and quick. If you sell liquid funds today before 3 PM, amount will be back by evening tomorrow in your account most probably (If you have chosen NEFT/RGTS as payout mode).
Its also true that most of the liquid funds investment are from big corporates who have huge cash.
Hi Pankaj,
Let me first say BIG THANKS for such a useful article.
I am looking for a liquid fund to park my money out of the salary savings account (in ICICI).
A. Can you share a recommendation? I want it to be very manageable experience (easy purchase from my ICICI account, easy redeem to my ICICI account) - so I was thinking of HDFC Cash Mgmt Savings fund.
B. Are there any typical charges (transaction OR maintenance) against such liquid MF accounts?
Thanks much.
@Kiran
For first time, you can fill a hard copy form and get a folio and HPIN generated for you in HDFC Mutual fund.
Once this is done, you can invest/redeem online on HDFC mutual fund website (https://investor.hdfcfund.com/mfonline/)
There are no entry/exit load, transaction/maintenance charges.
Investing in Liquidmutual fund is how better than term deposits??
@Poornima
Liquid mutual funds are better for short term (less than one year investment).
If you have cash lying idle in your savings account, but you don't need that for sometime (say one month or 10 months), you may invest in liquid mutual funds for better returns.
Good part is that, you can even invest for a day also.
You can do online purchase and redemption, whenever you need money, just redeem the units and amount will be back in bank account the next day.
What is a good timeframe to put in money into a liquid MF? Bank FD's offer 7-8% per year and cut 1% incase of premature closure, which turns out to be about 6%. The best liquid funds I saw on MoneyControl return about 6% at max.
Then what advantage does a Liquid MF offer over a bank FD?
@Gaurav
Liquid funds are good for keeping money for short term (as short as even one day). These give better returns than savings account interest.
Liquid mutual funds generally will generate less return that fixed deposits, but you can invest into them for even one week, one month or 6 months. For such small periods fixed deposits are not available.
If you have longer investment horizon (greater than a year), then Fixed maturity plans (FMP) mutual funds are better than fixed deposits. FMP Gains are taxed @ 10% without indexation and @ 20% with indexation.
Pankaj, you explained the advantage of liquid fund over savings account but gaurav's question was FD vs liquid fund. if with premature closure we get 6% on FD and same is with liquid fund. then what is wrong with FD? we can close the FD after a day or a week too. But we can use FD to get loan which I think is not possible for liquid funds. Plz elaborate on it.
@Kunjan
Premature closure withdrawal of fixed deposit will not give 6% but ongoing rate of interest for the period money was kept with bank minus any premature penalty.
As per most of the bank terms: The interest rate applicable for premature closure of deposits will be lower of : The base rate for the original/contracted tenure for which the deposit has been booked OR The base rate applicable for the tenure for which the deposit has been in force with the Bank.
Let's say if fixed deposit was broken in 40 days, bank will pay current going on interest rate for 40 days - penalty on premature closure (1% in case of most of the banks).
So you will get effective 3% annualized return (4%-1% penalty). Whereas in liquid you could have generated 5-6% annualized return.
Regarding loan on fixed deposit, bank will only give you loan on amount deposited with them at an interest rate higher than deposit rate. So there is no point getting loan, when you already have money withdrawn from own funds.
Dear Pamkaj,
Could you please explain what is indexation.
Thanks.
Purshottam
@Purshottam
Indexation is a technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation.
Govt declares CII (cost inflation index) value every year to compute capital gains using indexation.
Lets say you did some investment in year X for Sum A Rs. Now you sell this for Sum B in year Y.
Then capital gains with indexation = B - (A * ((CII for year Y)/(CII for year X)))
Thanks Pankaj.