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15
Jun

Use Liquid Funds To Grow Your Money

For most, savings means keeping the excess amount in their savings account. While this may be a good start it is not the best way to grow your money. Savings bank accounts in most banks offer an interest rate of 4%, some even offer 6% returns on deposits. While a little bit of extra money is always welcome, why settle for less when lucrative options are available? Fixed deposits also offer good returns, but liquid funds are a much better option. Here we will tell you more about them, and why you should consider them instead of the usual savings account

What Are Liquid Funds?

Liquid funds are mutual funds that usually invest in short-term debt instruments having a residual maturity of up to 91 days. The money market instruments that they invest in are commercial paper, treasury bills and certificate of deposits. As the name suggests, when it comes to pure liquidity they are only behind savings account. But when it comes to returns, liquid funds trump savings accounts by offering interest rate returns of up to 8% on an annualised basis.

Better Returns

The simple reason to invest in liquid funds is that it gives higher returns. As a rule of thumb, financial experts advise that excess cash equating to one month’s expenses, should be parked in a savings account, whereas any amount more than that will be better off in a liquid fund. The interest from these funds are to the tune of 8%, way higher than 4% interest that is the norm in most saving accounts.

Moreover, there are also dividends declared by liquid funds, which can be on a weekly or monthly basis. These dividends are subject to dividend distribution tax of 28.84%, but they are tax-free in the hands of the investor, as the mutual fund deducts the tax before paying the dividend. It is also noteworthy here that the post-tax returns are still better than returns from a savings account. 

Tax Structure

Liquid funds give more tax benefits on returns as compared to savings account. Tax on long-term gains are at 20% (inclusive of indexation), the 10% without indexation option that was available earlier has been withdrawn. Short-term capital gains on the other hand are added to your income and the normal tax rates applicable to your tax bracket are levied.

Flexibility

Liquid funds are flexible by nature. The investor is free to withdraw small amounts whenever cash is needed. Similarly, he is also free to invest more money as and when surplus cash is on hand. And, there is no minimum period for investment either. If you have placed a redemption request before the cut-off time on the same day, the funds will be transferred to your bank account the very next day.

Conclusion

Liquid funds have a lot going for them. Not only do they serve as a safe platform for investing with attractive returns, but also offer relatively low rates for taxation. Their flexibility and liquidity factor too make them a must-have in your investment portfolio.

Edelweiss Partners has a dedicated distributor-focused online mutual fund platform that aids mutual fund distributors and partners to offer a comprehensive bouquet of mutual fund schemes across categories. Learn more about our mutual funds offerings.

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