Banks offer lower rate on deposits up to 90 days, liquid MFs' returns over 6%
IF YOU are attracted to invest in bank fixed deposits because of the safety factor, you will do well to avoid the ultra-short-term fixed deposits and look for avenues such as short-term liquid schemes offered by mutual funds.That is because most banks offer a lower rate of interest on term deposits of up to 90 days than the savings rate of 3.5 per cent.
What it means for an investor is that if you invest in a fixed deposit with tenure of less than 90 days, you will earn a lower return on your investment than other avenues where you could park your money for a similar tenure. Thus, you will be better off even to keep your liquid asset lying in your savings account and earn more.
In fact, once the daily rate calculation method in your savings accounts kicks in from April 1 this year, you will gain another 30 to 50 basis points (one basis point is equal to one-hundred of the percentage) over and above the present 3.5 per cent savings bank interest rate.
Banks such as IDBI Bank, Bank of Baroda, State Bank of India offer an interest rate of 3.25 per cent, 3 per cent and 3.25 per cent respectively on a deposit for a 90-day period.
With short-term yields firming up and likely to hold steady over the next few months, financial experts advise investors to park their money in liquid funds as an alternative to savings bank.
Investors who have money for a short term, can generally invest in liquid funds because they are by all means better than deposits. All these funds have given, on an average, the tax-free returns of over 6.5 per cent per annum.
Liquid fund as the name suggests are mutual fund AFP schemes that keep money "liquid" (almost cash).
These liquid funds are debt funds that work in money market instruments. It is a market where short-term borrowing and lending takes place.
Since there is lack of awareness among retail investors, they tend to park funds in these short-term deposits. They could on the other hand, invest in shortterm liquid funds where they can earn higher yields and it's safe also.
Many liquid mutual funds such as Birla Sun Life Short Term Opportunities, JM Money Manager and LIC Savings Plus, to name a few, have yielded a return of 7.06 per cent, 6.01 per cent and 5.70 per cent respectively.
