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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Hi Pankaj,
Nice! I hope after long search i got what i was looking for.
I am completely technical guy with no financial knowledge. I have all my saving (quite huge for last 10 years) in saving account and few in FD.
Your article now made me to think over my saving habits.
I would like to know if there are any other such articles from you which give guidance for people like me.
Thank you for your efforts!
-C. Patil
@Mr. Patil,
I am also a technical guy :)
Just want to learn and explore more and more.
Hi Pankaj,
Can we invest for short term like a week or two? What returns we will get? I have checked returns of some of the liquid funds. Even though these funds have 9 to 10 % annual return, return for a week is 0.02 % & return in month is 0.05%. How it is like that?
@Pankaj,
Yes, you can invest for very short term like a week or two or even few days. As of now, you will get 6-7% yearly return on these funds.
Hi
Pankaj,
Is this good time to invest in Debt or Equity funds?
Can you suggest me some good debt funds.
I am looking for some steady moderate gains.
Suggest me ,which category of mutual funds are good at this point?
As most of the funds have reached their best NAV value of the last 52 weeks,
Can i expect returns?
Thanks,
raju
@Raju
Invest in debt fund only if you need money in near future. Lets say you want to buy home or a car in next 1-2 years then you will not want to take out less money than the invested and want to play safe for that period.
If you investing for a long term and you have enough surplus money then better go with equity as markets are in recovering phase and you will get better returns with equity but there might be a risk involved.
Debt fund will give you same return as bank's current interest rates in fixed deposits (6-7% as of now, and that is safe and for sure). Equity can give better return in current market but it can also give you negative returns as well.
Thanks Pankaj,
I have been investing in ELSS funds every month as long term investments,along with that i want to invest some amount in either debt or balanced funds to get some positive returns,which i can use it for short term goals as you mentioned.
Can you suggest some good performing funds in this category.
---
raju
@Raju
Balanced funds are also a mix of debt and equity and they also can go negative at times.
If you want to be 100% sure that you get some +ve return at any point of time, invest in debt funds.
Currently you may invest in LIC liquid fund, HDFC cash management fund or Birla MIP saving plan.
hey Pankaj, I really liked your posts. These are very helpful. I am currently planning to invest in hdfc unit linked wealth multiplier (http://www.hdfcinsurance.com/Products/SavingsPlans/WealthMaximizer.aspx)
Would you recommend this over Mutual funds over a period of 10 years? Please advice.
@Ranjana,
Its better that you don't mix insurance and investment. ULIPs have high load charges.
You can get a pure term insurance for a very small amount and put rest of your money into Equity mutual funds.
Thanks Pankaj, can you please suggest some goof mutual funds. How is ICICI right NFO fund or HDFC Top 200. Should I instead go for non-bank funds?
@Ranjana
Out of these HDFC Top 200 is better.
Your articles are very informative & enlightening .
Thanks for your knowledge sharing .
Alokmoy
hi..am living in chennai....i need to invest money in mutual funds...i have some money in a bank savings account...as u said it is best to invest in liquid mutual funds...could u tell which is the best mutual fund which shows its consistency in the current market.I dont know much about mutual fund,your opinion is much needy for me.....
@Jeeva
You can invest in HDFC cash management fund or LIC liquid fund.
Hi Pankat,
Thanks for providing such useful info on investment.
I have selected 4 ELSS funds for investments under Sec 80C(2).
HDFC tax saver
Sundarm tax saver
Religare tax saver
Birla tax relief 96
can i invest the money in above fund, i will have few more bucks in my hand even though i invest in above schemes. pls let me know few more schemes under ELSS and pure equity funds....
Thanks
Raju
@Raju
All of these are good funds.
Other good ELSS schemes are SBI Magnum Tax Gain Scheme 93, Franklin India Taxshield, ICICI Pru Tax plan, Fidelity Tax Advantage
and good equity (non-tax savings) funds are : HDFC Top 200 Fund, Birla Sunlife Frontline equity fund, DSP Backrock Top 100 fund, Sundaram S.M.I.L.E Fund and HDFC Equity Fund
Nice job Pankaj..
I got a lot of basic ideas about investments, MF, insurance, Tax savings schemes etc from your article.
Its very useful for starters as like me..
Keep doing....
Great Article. Thanks Mate!