Suppose you get your Salary/Rent on the 1st of every month.
It is unusal for you to have your entire months expenses on the 1st itself. The expenses will be staggered and spread throughout the month.
Ex
Mobile bill on 5th
School Fees on 10th
Credit Card on 15th
EMI on 20th
Monthly SIP on 25th
Till these expenses come up, you tend to lock your money in Bank wherein you are getting 4% (yes, some banks do offer 6% for Saving Bank Account, but these rates come with lots of conditions like balance of more than 1 lakh)
So, when I consider 4%, you are better off investing in Liquid Funds where returns match 1 year Fixed Deposits. Right now, even the underperforming liquid funds have been giving 8%, which is DOUBLE the rate of Saving Bank Deposit.
Another Advantage of investing in Liquid Funds instead of keeping in SB account is that Liquid Funds are in true sense “liquid” that is, you get your money within 24 hours and whats more some AMCs also offer ATM Card for your investment which you can use to withdraw money anywhere, anytime.
Theoretically speaking Liquid Funds are not Capital Safe but Liquid Funds invest in Money Markets, Short Term Corporate Deposits and Treasury and hence very liquid and very safe as all these instruments have very low risk and enjoy high liquidity.
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The Average returns of Liquid Funds has always beaten SB Account Interest by a minimum of 1%
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True, Dividend on Liquid Funds are taxed at 28.3% but Interest on SB interest is added to your overall Income and is taxed as per Tax Slabs.
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Interest on Liquid Funds is paid out on Daily basis where Interest on SB Account is paid on Quarterly basis.
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There is no charges by AMCs if minimum balance in Liquid Fund goes below the prescribed minimum balance, whereas Banks charge anywhere between Rs.50 to Rs.1000.
So, if you an investor who comes under High Tax Bracket of 30%, you are advised to go for Dividend option wherein your Capital Gains is nullified and if you are in Lower Tax Bracket, you can go for Growth option and take the advantage of Indexation to reduce your Tax Outgo.
Prudent financial planning says that an investor should have some Contingency fund to face any Emergency situation in Life. So, keep cash at home and the balance should be divided in SB Account and Liquid Fund depending on your requirements.
I normally advise investors to keep 1/3rd of Contingency Fund in Liquid Funds. After all, an 8% return with 1 day Liquidity is always much better than a 4% in SB Account!
Caveat : Do not use Liquid funds for Investment use them purely for parking your Temporary money.
WHY LIQUID FUNDS? & When to use them??
I have always advocated that EVERY investor regardless of his Financial Stature should mandatorily have a Liquid Fund in his portfolio. This fund could be for his Emergency, for his Day to day expenses, anything that is needed at a short notice.
WHAT IS A LIQUID FUND?
Liquid fund as the name suggest invest in money market instruments, treasury bills, etc which have a residual maturity of less than 91 days.
They do not have Exit Load.
WHY LIQUID FUNDS?
Liquid funds give much higher returns than your Savings Bank account without compromising on the safety and liquidty of your investment.
Liquid funds have no exit loads
Redemptions happens in an instant!!
WHEN CAN I REDEEM LIQUID FUNDS?
Redemption's can be done fully or partially at any point of time. In fact, some Fund Houses give you the option of redeeming INSTANTLY. Yes...You get the liquid money in your SB account in less than 30 mins!!!!
Just because Liquid funds are safe, do not make the mistake of investing in Liquid funds if your time horizon is pretty long. Take the advise of a Mutual Fund Distributor who will guide you.
WHEN TO INVEST IN LIQUID FUNDS??
- Your salary till your next EMI due
- Bonus till you spend/plan it
- Sales proceeds of your flat till you invest in new one
- Funds created for your child's education /marriage till you use it
- LumSum amount lying in your bank account which you may be required