Keeping money in the savings account or short term FD’s are the easiest way to invest the surplus funds but may not be the smartest . We all have some expenses coming yearly / half yearly / quarterly or may be monthly like school fees , insurance premiums , house taxes & maintenance , vacations etc in case of individuals and different taxes , short term payments in case of companies . Such funds are lying idle either in savings / current account or short term FD’s . The post tax effective returns on savings account and short term FD’s are much lower as compared to liquid funds .
What are Liquid Funds?
Liquid Fund is a category of mutual fund which invests primarily in money market instruments like certificate of deposits , commercial papers , treasury bills and term deposits.
Certificate of Deposits : Financial institutions like banks need short term funds for various reasons . So , they raise money from the market which are called certificate of deposits .
Commercial Papers : When public and private companies need short term funding , they raise money from the market which are called Commercial Papers.
Treasury Bills : We all know that Government borrows funds by issuing long term bonds . Similarly , when they need money for short term says 30 – 90 days or so , they raise it from the market which are called Treasury Bills .
Bascially, liquid funds park their funds with banks , government and companies for short period ( mainly below 90 days ) .
Please refer the returns for 1 month , 3 months , 6 months and 1 year of CRISIL Liquid Fund Index as below. You can see the line which is heading upward and always above zero in all periods .
|Index : Crisil Liquid Fund Growth||0.66||2.05||4.21||8.6|
Please find the comparison of liquid funds with SBI Savings account , SBI short term FD rates for 60 & 180 days .
|Comparison||SBI Saving A/c||SBI 60 days FD||SBI 180 days FD||Liquid Fund|
|Amount after 2 months||6,667||11,250||12,083||13,333|
|Returns for 10% Tax Bracket||6,000||10,125||10,875||12,000|
|Returns for 20% Tax Bracket||5,333||9,000||9,667||10,667|
|Returns for 30% Tax Bracket||4,667||7,875||8,458||9,333|
Features and Benefits of Liquid fund
- No Entry and Exit load .
- No Lock in period
- Easy liquidation ( Hence the name ) .Funds can be redeemed within 1 working day.
- Great tax benefit
In a nutshell , give a wake up call to your idle fund and let it work for you .
Happy Investing !!!