Returns from the money kept in savings bank account are very low. If you want to keep your money safe but at the same time earn better returns, then here's is a better option.
Everyone keeps some money in one’s savings bank account. However, returns from the money kept in such accounts are very low. If you want to keep your money safe but at the same time earn better returns, then here’s is one option. In this article I wish to discuss a product where you can park your temporary surplus fund to get better returns than those generated from a savings bank account. Liquid fund is one such product. Let us discuss the various features of it.
What are liquid funds?
Money from these funds can be withdrawn without incurring any exit load and within the shortest possible time. You can invest your surplus fund in liquid funds even for one day. Generally money in liquid fund gets credited to your bank account within a day’s time after you have requested for redemption. There are some fund houses like Reliance Mutual Fund, DSP BlackRock Mutual Fund, Aditya Birla Sun Life Mutual Fund, SBI Mutual Fund and UTI which offer you instant redemptions up to lower of 90% of your investment or Rs 50,000.
These funds invest in treasury bills, call money and deposit certificates of banks with a maturity period of up to 91 days. As the maturity period of underlying investments is very small, these funds are safer and less volatile in terms of returns generated. The returns on liquid funds are generally a little higher than bank fixed deposits with added liquidity in terms of facility to withdraw the money fully or partially at a short notice at no costs like premature withdrawals charges levied in case of fixed deposits. The average annual returns generated by liquid funds during the past one year are 6.70%, which are comparatively better than the FD returns.
When the liquid funds can be used?
Liquid funds can be used under various circumstances. Salaried people who have to maintain money in their savings bank account for payment of their home loan EMI/house rent or for paying credit card bills, instead of keeping the money in a savings bank account, which earns you around 3.50% returns, can temporarily park this surplus money with liquid funds. The money in liquid funds can be transferred back to your savings bank account just a day before the date on which your EMI hits your bank account or the due date of payment of credit card. Likewise, the people who are looking to buy a house have necessarily to keep money in a savings bank account as the money may be needed at a very short notice. So, they can park such funds in liquid funds and get better returns and liquidity at the same time.
Likewise for investors who have surplus funds and want to invest in equity funds can also invest the lump sum money in liquid funds and do a systematic transfer plan (STP) from the liquid funds to equity fund of their choice as investing big lump sum money in equity mutual funds is not advisable due to the volatile nature of equity investments. Even people who have withdrawn their investments from their equity fund due to their goal approaching or for the purpose of effecting rebalancing of the assets to maintain predetermined asset allocation ratio, can also use liquid funds for maximising their overall returns.
Taxation aspect of liquid funds
For taxation purposes, liquid funds are treated as debt funds and accordingly the investment in liquid funds becomes long term when units of liquid funds are held for more than 36 months. In case of liquid funds used for the purpose of making investments in equity funds at intervals through STP or for shifting your investments from equity funds to liquid fund, each transaction of shift is to be considered separately and in case the units involved in such transfer are held for more than 36 months, the investment is treated as long term and get the benefit of indexation in respect of those units which have completed 36 months of holding. In respect of profits realised on units of liquid funds held for less than 36 months at the time of their realisation, the same are treated as short term and are added to your other regular income and taxed at the slab rate applicable. In case the units are redeemed/switched after having held for more than 36 months, the indexed long term capital gains are taxed at fixed rate of 20% plus the applicable surcharge and cess.
How to do it?
With the advent of online banking facilities as well introduction of smart phone application/online platform for execution by mutual fund houses as well as their registers, making and redeeming investment in a fund including liquid funds has become as easy as sending an email. So you can carry out the transaction and redemption of units of liquid funds with your phone anytime anywhere.
(By Balwant Jain, tax and investment expert. The author can be reached at firstname.lastname@example.org)