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A large number of investors keep substantial sums of money in their savings account that usually earn very low annual rate of interest. Although, some select ones offer rates of interest as high as 7% per annum, but most banks would give you not more than 4%. In a situation where returns from other investment products are tough to come by, the question is are there any products that can offer better returns?
One of the avenues popular among large investors is the liquid funds that offer nearly the same flexibility as savings bank accounts, but offer better post-tax returns with slightly higher risks. Since April 1, this equation has slightly changed after the government allowed interest earned from savings bank up to Rs 10,000 per annum to be tax free, but still liquid funds retain their edge over savings bank.
Liquid funds are those mutual fund schemes which invest in very short term debt and money-market instruments like certificates of deposit, commercial papers, treasury bills and some other money market instruments. Most of these funds also do not have entry and exit loads, and have very low charges, which is around 0.5% per annum.An advantage that brings these funds closer to savings bank accounts in terms of liquidity is that these schemes could be redeemed within 24 hours. And in case you put in the redemption request before noon on an working day, you can get the money the same day.
In terms of risks too, they come very close to savings bank accounts. Since these schemes invest in short term instruments, large part of which usually is in government papers, the risks are low. But you should remember that even in savings banks, your money in every account is insured only up to Rs 1 lakh.
According to industry veterans, liquid funds are ideal for parking money when you are trying to decide where to invest for the longer haul. Usually they say that one should keep money in liquid funds for between 7 days and three months.
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