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.
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.
I want to invest 4000per month.I am total new to this investment world.As your suggestions i am interested in liquid fund but i couldn’t find liquid plus funds.Please suggest me how to make my investments fruitful.I am too motivated by your posts.Thanks sir.
@Suman
Depending on your age and future money requirements, you can invest in Equity, Debt or Liquid funds.
If you have surplus money and want to invest for period more than 3-5 years, you can invest same in Equity diversified mutual funds. But there is risk associated with it.
If you want to invest for 6 months to 2 years, you can invest in FMP (Fixed Maturity Plans) mutual funds. These are safer investments and better than bank fixed deposits.
Liquid funds should be chosen to park liquid money, which may be needed in short term (15 days-6 months). These are also pretty safe and better than keeping money in savings account.
Firstly thanks for your valuable reply.I as per my observation decided to invest 2000 in dspblackrock top 100 equity,1000 in idbi nifty index fund and as i am a businessman so i decided to invest 1000 each in Fidelity Tax Advantage Fund HDFC Tax Saver Fund also i have no need for liquid money. So is my decision right.Please suggest.
@Suman
All funds selected by you are good. You may continue investing in them.
If i deposit Rs 24000 in dspblackrock top 100 equity rather then depositing 2000 each month would be better in any way or it would let me troublesome.
Exit load in tax saver fund?
@Suman
Generally SIPs are better than lump sum investment for a normal investor.
But If can you time the market, then lump sum is better. i.e. invest in bearish market when mutual funds are at low NAVs. Predicting the market is not easy and require full depth knowledge of share market, global and local economy etc.
There is no exit load on tax saver mutual funds. They have a lock-in of 3 years.
Please you provide some good liquid funds
@Ramesh
HDFC Cash management savings plan, LICMF Liquid and Birla sunlife floating rate are some of the good funds.
Hi pankaj
thanks for valuable information.
i wanted to know the difference between ulip and mutual fund which one i better?
thanks
@Pawan
ULIP is insurance combined with investment under one package, whereas mutual funds are investment only product.
Its better to keep insurance and investment separate. So invest in mutual funds and buy a term insurance.
Hello Pankaj ,
I have a Demat account . Can I directly purchase these funds from that account? will that be better.Currently I am looking forward to so some investments online ,rather than doing it with hardcopy form submission and all.
I have the net banking account with ICICI . does any of this help me in openning or investing in such liquid funds.
@P Kumar
Most of the online trading account have mutual funds transaction facility. You can check it with your online demat/trading account.
Instead, you can read about more options here: How to transact in Mutual Funds online.
hi pankag, most of the times i have some amount in my savings account which i would not investing in 2-3 months..my main concern is tax issues as i fall in 10% bracket.
1.what is the treatment for tax for liquid funds?
2. what is the differnece between growth and dividend option. are they taxed differently?
3. with saving accnt offering 4% now is it worthwile for a person falling in 10% to invest in liquid fund?
thx.
@Sandeep
Returns on liquid funds will be added to your income and will be taxed as per your slab rates. Its same as with bank savings account interest.
Liquid funds are better in returns than saving account. Tax treatment is same for saving interest and liquid mutual fund gain.
hi panakaj, thx for your reply..could you plz clarify on growth or dividend option..and also which is best suited for??
@Sandeep
Dividend is better for liquid/debt funds as they payback at regular intervals.
Hi Pnakaj, How liquid mutual funds are better than recurring deposits?
@Pavankumar
Liquid mutual funds are not much better than recurring deposits.
These can be used to park money for shorter duration and not very good for investment of more than 6 months period.
Hi Pankaj,
I read on some websites that charges on liquid funds vary between 0.3%-0.7 % and on other websites I read that there are no extry/exit load or allocation/maintainence charges on liquid funds. Which one of these two is correct. Suppose if I invest Rs 5 Lac for 15 days in a Birla Sun life cash plus -Institutional Premium Plan-growth, what will be the charges on this (please tell me about any and every charge that might be charged)
Also, are the returns from a liquid plan taxable? I read on a webpage that in case of growth plans the returns are taxable as per the individual tax bracket and in case of dividend plan, the tax is deducted before the payout of dividend by the bank. Some other websites say the returns are tax free. This is really confusing. Kindly help me understand with the same example as above.
Thanks & Regards,
Aditi
@Aditi
Charges like 0.3-0.7% are fund management/operating expenses. Mutual fund company take out some amount from investment for their salaries, operation and marketing costs.
This is different that entry or exit load. This charge is not deducted directly from investment amount but same is adjusted in NAV (net asset value) of fund.
There is no entry or exit load on BSL Cash Plus Inst Premium-Growth but minimum investment is 5 crores.
If you sell liquid growth funds before a year, all gains will be added to your taxable income.
Dividends on liquid fund attract dividend distribution tax (payable by mutual fund company) before payment to investor. Investor does not have to pay tax on dividends from liquid funds.
hi Pankaj,
Thank you for your reply.
Is it true that funds investing in government securities are more volatile in short term than those investing in corporate papers?
Can you suggest some good funds? I am looking at parking Rs. 15-20 lacs, partly for 15 days and partly for 2-3 months.
An agent from birla sun life suggested the BSL cash manager and the BSL ultra short term fund. Another agent from ICICI bank suggested the ICICI liquid plan. Also, I read that tata and templeton have good liquid plans. Can you suggest me the best ones available in the market for my investment criteria.
Also, I understand that if one falls in a tax bracket of above 10%, it is advisable to go for the dividend option rather than the growth. Is this correct? If yes, is a dividend reinvestment better or the dividend payout?
Thanks & Regards,
Aditi
@Aditi
Corporate papers are riskier than Govt securities, but can provide better returns on investment.
You can invest into HDFC Cash management fund savings plan, HDFC Liquid fund and Birla cash plus.
You can compare return of liquid funds yourself on following links:
http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=1
https://www.moneysights.com/mutual-funds/mutual-fund-basic-view#!/2/1/13/Money-Market-Funds
In case of dividend base investment, DDT (dividend distribution tax) will be deducted at 28.33% before payment by mutual fund company. In case of growth based investment, returns will be taxed as per your slab rates (0-30%). So if you fall in 30% bracket, invest in dividend payout option, else growth is good.
Dividend reinvestment is not good in case of debt based funds as dividend after 28.33% deduction will be invested back to folio.
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 entry load 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.
The link is quite helpful,thanks.
How do I make out if a fund is a liquid fund or a liquid plus fund? Does the name of a liquid plus fund (always) have a ‘plus’ in it?
I have shortlisted some funds, it will be nice to know your views on these: 1. Tata Liquid Super Hi – G 2. HDFC cash mgt fund savings plan – G 3. HDFC liquid premium plus – G
Also, based on what is given on some webpages, Escorts Liquid – G looks pretty attractive. However, I am not sure about ‘Escorts’. The AUM is also pretty low for this fund. What are your views on this fund.
I think it will make more sense to invest in atleast two seperate funds than to put all money in a single fund, pl suggest.
@Aditi
Please check minimum investment amount before shortlisting a fund. Tata Liquid Super Hi-G and HDFC Liquid premium plus-G both have min investment amount in crores.
Also, before making a choice also see their holding structure. e.g. on this page: https://www.moneysights.com/mutual-funds/mutual-fund-details/5190/Tata-Liquid-Fund—SHIP—Growth check graphs at bottom.
Also, what is the difference between liquid and liquid plus funds? I understand that liquid fund works with the previous days NAV and liquid plus works with the same day’s closing NAV. How does this impact my investment. Which one is better suited for me.
what is best to go for in the current market situation? SIP or liquid fund. also are there any FDs of saving kinds tax free frm where we cn tk money anytime.
@Khushwant Singh
SIP are always good in any kind of market situation as cost of buying gets averaged out.
If you are looking for long term investment (more than 3-5 years), then you can start SIP in diversified equity mutual funds.
Liquid funds are good for short term investments (1 day – 6 months).
For tax saving, there are fixed deposits available, but amount is locked-in for five years.