Liquid Funds – An Excellent Alternative to Savings Account

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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 .

Fund 1m 3m 6m 1yr
Index : Crisil Liquid Fund Growth 0.66 2.05 4.21 8.6
1 month Return
1 month Return
3 months return
3 months return 
6 months return
6 months return
1 year return
1 year return

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 invested 10,00,000 10,00,000 10,00,000 10,00,000
Period (months) 2 2 2 2
Annualised Returns 4% 6.75% 7.25% 8%
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 !!!