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They can help earn returns till you require money or generate regular cash flows
Liquid funds, which are usually the best bet for parking idle money for the short term, are a good substitute for savings bank accounts. In addition to this advantage, liquid funds could also be used for a variety of other purposes, but the underlying idea in all the cases is to use these schemes for parking money for a very short duration, say for a few months. Here are some of the options and situations that, according to financial planners and advisers, you can make use of the advantages that these schemes offer: flexibility, tax efficiency and liquidity.
Park short-term funds when utilisation time is uncertain
There are payments of various types that one may need to make over different intervals of time and prepares in advance for them. These may include EMI for a house, children’s yearly school fees at the beginning of the academic year, some social commitments and other payments. While in most cases the exact time of payment is known, it may not be so on certain occasions. And in such instances, a bank or a company FD may not be the ideal place to park your money which you have earmarked for those payments. However, liquid funds would suit the bill.
You can put your money in bulk or in as many lots as required. In addition, it would earn more than double the savings bank rate of interest, which is similar to a bank FD rate, and can be taken out in as many lots as required. It takes about 1-2 days to take out money from a liquid fund, and the funds redeemed from these schemes can go directly to your bank account, thus bringing ease of transaction to the whole process ” he said.
To match cash flows
You may be faced with a situation in which when you get your money is not fixed, but your spends are quite regular and at pre-fixed times. For example, a large number of retired and retiring persons have subscribed to the tax free bonds over the past two financial years. Their returns will come as annual interest on a fixed date. However, he/ she may require the money on a monthly basis. These annual interest payments can be invested in a liquid fund and then you can go for a systematic withdrawal plan (SWP) so that you receive your money on a monthly basis.
Setting up a monthly pension plan
At retirement, an individual gets the bulk of the retirement corpus in one shot. T here are chances the person may not get a monthly pension or may require to supplement the pension being received. In such situations, the first year’s pension requirement can be put in a liquid fund and a SWP is set up. The balance could be suitably deployed in short-term / long term debt funds and equity funds as per the risk analysis, fund requirement and the time when such requirement would trigger. Every year’s requirement can be shifted to a liquid fund at the beginning of the year, and this could work as a pension plan.
Spreading investments in equity funds
It’s never advisable to invest a large chunk of money in equity funds at one go. So even you have a substantial amount of money to put into equity funds, invest a major portion in a liquid fund of the same fund house where the equity investment is to be done, create a weekly systematic transfer plan (STP) over the next few months according to the advice of your financial planner and let the bulk money go in small lots into the equity fund like an SIP. While the money gets deployed in equity fund in small lots, the undeployed amount earns liquid fund returns, currently which is about 8.5-9% per annum. In case, the market scenario changes and there is a need to shift larger or even the whole amount to equity funds, this can be very easily done since liquid funds have no exit loads.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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