Cash is king! However, if it rests idle in your account, then the king is insignificant. There have been many instances where money is parked in our savings accounts for months and years, earning you paltry returns. Instead, if you deploy your funds into a liquid fund, the returns would be at least 60% to 70% higher than the bank savings rate. Yes, you read that right! Money can be invested here for a few days/months and liquidated without any charges or penalty. Upon liquidation, the funds would credit back into your savings account within one working day. You must be wondering why banks don’t recommend these type of products? It’s simple, the commission earned here is stingy and it certainly doesn’t add to their revenue targets. Try reading any company’s annual report and see where they park their idle money smartly, it is into liquid/ cash funds.
A liquid fund is a debt mutual fund that invests in very short-term safe instruments like commercial papers, treasury bills, certificates of deposit, and so on. Liquid funds generally invest in instruments that have a very high credit rating, predominantly government papers.
Returns And Taxation:
Liquid funds bear the lowest interest rate risk among debt funds as mutual fund houses generally invest in fixed income securities with short maturity. Liquid funds are available in different plans like growth plans, daily dividend plan, weekly dividend plans and monthly dividend plans. Growth plans don’t declare any dividend, and appreciation of fund is reflected in higher unit value. Currently the returns here are over 8% annualised. In growth option, the gains are taxable as per the investors tax slab, hence it is ideal for someone who is in nil or 10% tax bracket which brings the net post tax return to around 7%, now that is way higher than the banks savings rate.
In case the investor is in the top tax slab of 33% then choosing a “Daily Dividend Re-investment” option is appropriate, here the dividend is declared daily and subjected to a dividend distribution tax of 28.84% which is already deducted prior to declaring dividend. The return net of tax is around 6.5% which is again way better than your banks savings rate that delivers a post-tax return of 3% to 4%.
This instrument is ideal for investors who have large corpus resting in their savings account for a future financial commitment and want to temporarily park somewhere safe for a few days/ months to earn higher returns. Like every drop that
makes an ocean, every penny earned will make millions.