A lot of us let our money sit idle in the savings account. Well, if it were the 90s, I wouldn’t mind doing it myself but not anymore. We are now in an era of lucrative investment options. The options that can easily replace the boring and conventional savings account and can earn you better inflation-adjusted returns.
Lack of time, orientation or indecisiveness - whatever maybe your reason for keeping your spare cash in low-yielding saving accounts. It is time to give its alternative, Liquid Funds, a try.
Liquid Funds are ideal for short-term needs as they invest in money market instruments like commercial paper, treasury bills, certificate of deposit etc. up to 91 days. Their investment strategy helps in mitigating risk due to interest rate volatility, offering high liquidity to your portfolio with decent returns.
What makes Liquid Fund worth a try?
- Many Liquid funds offer Instant Redemption option that allows you to transfer redemption amount to your account in less than 30 minutes
- No lock-in period
- Lowest Interest Rate Risk among Debt Funds
- No exit load
- Best short-term investment vehicle during high inflation periods
- Offers flexibility to choose from various plans - daily dividend plan, weekend, monthly dividend plan, growth plan
- Better Post Tax Returns
- Professional Management
Risk & Returns:
Liquid funds are exposed to interest rate risk and credit risk. A change in the prevailing interest rates may cause a change in the price of the debt instruments. This, in turn, may cause the NAV of the liquid fund to fluctuate. Since liquid funds invest mainly in money market instruments, you may not find sharp fluctuations in the NAV of the fund.
Credit risk means the probability of default in the payment of interest and principal by the issuer of the debt instrument. This can be avoided by going for liquid funds which invests in quality papers.
In terms of returns, liquid funds give out better inflation-adjusted returns. On average, savings account offer 4% returns while some may offer higher but with the condition of minimum deposit. Liquid funds offer around 7-9% returns before taxation.
Liquid Fund Taxation:
Liquid funds are taxed based on the holding period. If you sell the fund before three years, Short Term Capital Gain tax is applicable as per your tax slab. And if you hold it for more than three years, Long-Term Capital Gains tax of 20% with indexation benefit is applicable.
In case of savings account, you would be taxed as per your income tax bracket. Section 80TTA allows deduction on interest earned up to Rs. 10,000. But savings account work out to be a costlier option for high-end tax bracket investors.
Overall, liquid funds beat savings in all aspects except for risk. But as they say, there is no such thing as a free lunch. No gain without risk.
If you are willing to get better returns than a savings account, Liquid Funds should be your go-to for contingency funds or parking spare cash. You can buy liquid funds in less than 5 minutes at 5nance.com. Log in today!
