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Liquid Mutual Funds give higher returns than savings account

PEOPLE are used to keeping temporary surplus cash balances in a bank savings account, as a matter of habit, convenience and also, due to the safety offered by banks. To make these accounts more attractive, interest rates on savings accounts of banks are going up as well. Once upon a time, the interest on savings account balances used to be calculated on the minimum balance between the 10th and last day of the month. This method of calculation was changed to the average balance method by the regulators. The rate of interest, which used to be 3.5 per cent per annum earlier, was raised to 4 per cent and has now been deregulated altogether by the Reserve Bank of India (RBI), giving banks the freedom to offer a higher rate of interest as per market competition. Three private sector banks have already raised the rate of interest on savings accounts to 6 per cent and other banks may follow suit as per their requirement of funds and competition.

However, it is possible to earn higher re turns, in a safe and liquid investment instrument -liquid schemes of mutual funds. These funds invest in money-market instruments like certificates of deposit issued by banks and commercial papers, issued by non-banking financial companies (NBFCs), to name a few, with residual maturity less than three months. The net asset value (NAV) of the funds is published every day and the asset management company (AMC) running these funds offers daily purchase and redemption at NAV-based prices. The method to purchase/ redeem a mutual fund scheme unit is to either go directly to the office of the mutual fund/registrar and transfer agent (RTA) or go through a financial adviser/planner dealing with the fund.

Although, a mutual fund cannot guarantee or indicate returns (being market related investments), we can look at returns delivered by liquid funds in the recent past, which are in the range of 8 per cent to 9 per cent annualised. In addition, the RBI repo rate, which more or less defines the overnight rate in the inter-bank market, has been set at 8.5 per cent now, hence, we may expect upwards of 8 per cent annualised returns from liquid funds.


So far, the highest rate offered by banks for savings accounts is 6 per cent, hence, there is a clear mark-up in returns from liquid funds over bank savings accounts.

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and invest in securities rated by the rating agencies such as Crisil/Icra, as per investment norms mandated by Sebi. It is safe to invest in liquid funds, along with the additional sweetener of higher returns.

The only advantage of a bank savings account, which cannot be matched by mutual funds, is the cheque writing facility. Bank savings accounts are not only an avenue for parking temporary cash surpluses, but, it is also al lows an account holder to transfer funds through cheques/ electronic routes and anytime fund withdrawal facility through ATMs. In a liquid fund, redemption request has to be submitted within the cut-off time of 3 pm for proceeds next day morning.

Investors should earmark funds that may be required in an emergency and park that component in a bank savings account/term deposit and keep the other component in liquid funds of reputed AMCs with a track record and reasonable quantum of assets under management.
 

The NAV of the funds is published every day and the AMC running these funds offers daily purchase and redemption at NAV-based prices

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