Fund Intro #1: Liquid Funds - When inflation is killing, and Fixed Deposits just aren't that appealing!


Posted By : Kushal Kothari
Tags :  debt Liquid funds wiki

Bank rates are at an all-time low. Yes, that makes your home loan really affordable, but investors looking for a safe and secure investment vehicle are left hungry for better alternatives. We want to take this opportunity to tell you briefly about liquid/money market funds and why you should know about them

 

Liquid/money market schemes

What are they? Highly liquid investments in high rated fixed income securities

USP? Get money back in your account anytime within 1 day without any penalty, earn annualised interest rate roughly equal to 1 year FDs. Favourable tax treatment as compared to FDs

Where do they invest? A portfolio of corporate deposits, FDs, government debt etc. that mature in less than 91 days. Usually, these schemes have the highest credit ratings among all debt schemes. 

Why should you invest? These are great instruments to park money that you can recall anytime you want with no exit charges and very low annual charges. A superior alternative to bank savings account (better rate) and Bank FDs (better liquidity). Great as interim investments to cover for planned expenses and as an emergency fund

Who should consider investing? Anyone with substantial savings in a savings bank account and/or fixed account. 

 

For a parity comparison, let's have a look at liquid schemes and the traditional bank alternatives 

Quick Look
  Savings account Fixed Deposits Liquid Funds
Expected Return 4%

7%

7%
Liquidity Very high (Instantly) Medium (Penalty on withdrawal) High (1 day)
Risk Very low Very low Very low
Tax Marginal rate with 10,000 benefit Marginal rate. Deducted every year Marginal rate, deducted at the time of withdrawal. Indexation benefit.
Expected Post-Tax Returns 
(30% bracket)
2.8%  4.9% 4.9%

 

Why should you invest in FD's? - The comfort of Bank account. Money is safe unless bank defaults (yes, that happens). 

Why should you invest in Liquid Funds? - Money can be withdrawn at a day's notice without any penalty. Money is safe unless one of the holdings, usually more than 70, defaults (even that happens). And finally, superior tax treatment.