Liquid Mutual Funds: A Better Opportunity for Investment Than Saving Account
Do you hold surplus cash in hand but don’t desire to lock them in fixed deposits? Then luckily, you have a better option to invest i.e. liquid mutual funds as an alternate of holding massive funds in your saving bank account.
In present high interest rate situation, if you desire to see your money growing faster while you hold them, then investing in liquid funds can be a better option than a saving account. Even though it’s been more than two years since the RBI derestricted rate of interests on a saving deposits, still most of the banks are offering around 4% rate of interest on saving deposits.
Whereas, average liquid funds return of the past few years is much higher which is around 8% as compared to the interest yield of saving funds that is even lower than the annual inflation rate. The best liquid funds can assist us to receive much greater interest rate than what is being offered by saving account without depriving of getting access on your money.
Brief description about LMF
Liquid mutual funds make investment of their amount in financial instruments like Treasury Bills, Commercial paper, Bank fixed deposits and other debt securities with a maturity period of up to 90 days.
These funds NAV are calculated for 365 days, dissimilar from other debt mutual funds where NAV is calculated on the basis of business days only. These funds have no restrictions of a lock-in period. Such funds sanction withdrawals to be processed in the period of 24 hours on business days.
These liquid funds have the lowest interest risk among all debt fund category as they invest in stable income securities with short period of maturity. Additional considerable advantage of these funds is that they do not possess any exit or entry load.
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As an investor which is better?
Investors usually compare between mutual liquid fund account and saving bank account because both are endorsed as a medium where investors can keep their funds for a short period and can utilize it according to their requirement.
For some investors, it is a platform where they can get easy entrance to their funds and at the same time gain higher rate of interest on their savings. But there are many distinctions that should be seen at the time of investing in these funds. It is good to pay attention before making any investment in this area.
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The first aspect where investors emphasize is the return rate on the several investments. Saving bank account usually offer around 4% rate of interest. However, some banks provide higher interest rate but this is usually the case for balances that are in surplus of Rs one lakh. For trivial investors who have some surplus money may not be able all the time to make use of greater interest rate in the saving account and therefore this is somewhat that should be considered into the calculation.
Whereas a liquid fund investor will receive identical rate of return no matter how much capital he has invested and hence here the mass of capital is not somewhat a determining aspect. However, there is a mechanism that the depositor has to comprehend in these funds i.e there is no inevitability about the gain of return.
It can differ and thereby it is something that might cause anxiety for those who desire to be ensured about the amount they will earn.
There is distinctive tax influence in the case of liquid funds and saving bank account. The interest earned on the capital from a saving bank account is under the control of an investor and deduction can also be availed in it.
The initial 10000 Rs income earned from saving bank account interest is not taxable and the taxation begins after the income breaches this limit. In the case of liquid mutual funds, the dividend earned is completely tax free. But there is a dividend distribution tax that is recovered from the investors secondarily with the units sold before the duration of 3 years which would be nominated as a short period investment gains tax.
Why investment made in liquid funds is better than saving account?
With the liquid mutual funds, you can avail the versatility to invest or withdraw whenever you desire without any fear of exit load or penalty.
Some top liquid funds deliver much higher rate of interest than return of a bank’s saving account.
Liquid funds make investment in short-time instruments such as treasury bills, commercial papers, certificate of deposits and various others.
Certain fund houses also provide ATM cards to withdraw money against your investments made in mutual funds.
Suitability of Saving account and Mutual funds
Liquid funds are appropriate for those who desire to earn higher capital gains than a saving account and desire their funds to be accessed at any time as well. Whereas, saving account is appropriate for folks who merely desire to park their money for the objective of storage purpose.
How you can boost the yield of return from through liquid funds?
Examine your position of tax and then consequently make investment in funds if you lie in high tax slab to manage tax accurately. If you fall in higher tax slab, you can consider the growth scheme, which will deliver maximum benefit of greater wealth creation (than saving account) and lesser taxation.
Always split your excess capital into liquid funds and saving account, which will be helpful to vanish your liquidity crunch.
Don’t extremely depend on liquid mutual funds and always analyze its risk reward pattern, tailored time period and match it to your risk endurance. Not all liquids can perform equally as they are somewhat related to mutual funds and are subject to market risks. Overall mutual funds provide a good opportunity to earn higher returns, if invested with caution.
Mr. Ajay Kumar Jain, M.Sc, Chairman And Managing Director
Being the Chairman And Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.