Very recently I was traveling from Kolkata to Kochi. I had to hop in Bengaluru, to catch a different flight to Kochi. Fortunately I met a childhood friend who is working with an MNC in Bengaluru. I just realized that we are no more boys, but are men, when start of our discussion is with the role at our workplace, technologies & tools used at daily work etc.
Within 2 days, I got a message from him with a question "Hi! Can you guys (IndoInvesting) help me park my money, where I can get better returns and flexible enough to redeem, as and when required?" I replied back, saying "Yes! Its absolutely possible; lets hangout, where I can explain you how IndoInvesting can help you."
Not everyone has a friend who can give such solutions. So, I decided to write a blog post to bring awareness about Liquid Mutual Funds and will soon come up with an educational video series too.
When an individual turns 18 or is about to join a college, we run to the nearest bank and open a savings bank account. This money in savings bank account (4% Returns) is to meet day-to-day expenses, or be a source of ready cash in times of emergency. But, when the same Individual turns 21 or starts earning, there is no one who will guide, where to park the idle money. Its not just the case with Individuals, even many corporate still keep their idle money in current account (0% returns).
This is simply because of lack of awareness between us, our friends and elders, who are only used to Savings bank account or Fixed Deposits but very little info on Liquid Mutual Funds.
What are Liquid Mutual Funds?
Liquid funds are debt mutual funds that invest in very short term money market instruments of upto 91 days. Generally they are open ended, with 0% entry or exit fee. So, Investor has the option to park one's idle money for few days to months or years and earn returns (as per fund performance) for the holding period. These funds are actively managed by expert fund managers.
After the demonetization, liquidity is back in the financial eco-system with more than 86% of the demonetized currency deposited into banks. This has induced the banks to lower interest rates in lending/loans, then on Fixed deposits and it expected to do the same with savings account in near future.
Though most of the banks give an interest of 4% per annum on savings accounts, its hard to beat the inflation. It means, your money is loosing value over time in real terms. Liquid mutual funds are market-linked mutual funds and have high potential to beat inflation compared to savings account. Liquid mutual funds posted an average annual return (CAGR) of around 7.5% for last 5 year.
Unlike interest earned on savings account, which needs to be declared in your income tax return annually, mutual funds get taxed only when you liquidate them. Liquid funds follow the taxation structure of debt mutual funds. There are two types of taxes, namely short-term capital gain (STCG) tax and long-term capital gain (LTCG) tax associated with it. We will have detailed blog post soon on mutual funds taxation.
But, we can use your savings bank account for many things. Our salaries are credited to savings account, it can be linked to your EMI, to bill payments etc. So, elimination of savings bank account is near to impossible in our daily life.
Though each of us want some amount of idle money for our day to day expenses, we have to plan our expenses that might arise in near future and we can invest the rest with liquid mutual funds which give better returns. With instant redemption of upto Rs. 50,000 and Card (ATM cum Debit type) facilities given by Liquid Mutual Funds, this category of mutual funds has become most attractive to invest one's idle money.
Those of you, who still procrastinate and mostly park money in savings bank account only, its time to wake up and taste Liquid Mutual Funds flavor.