Monday, 4 August 2014

Where Should I Invest my Idle Cash?

Instead of returns of 4-6% which you get in a savings account, you can easily get returns of more than 9% with as much safety, liquidity and stability by investing in this very popular product.

What are liquid funds?

A mutual fund scheme is a pool of money contributed by various investors. This money is then invested into different types of financial products as pre-decided by the scheme.
Liquid Funds are debt mutual funds which Invest in very liquid, short term debt instruments of highest credit quality like government treasury bills & money market instruments.
Unlike savings account or short term deposits, these funds invest in a highly diversified portfolio across banks and highest credit rated companies. As a result, the funds provide higher, steady & very stable returns.


Advantages of Liquid Funds over bank deposits:

Higher Pre-Tax Returns:
For past 3 years, the savings account rate for most banks has been in the range 4 to 6%. The Fixed deposit rates for 3 months to 1 year has been in the range of 7 to 9%.
The average returns in Liquid Mutual Funds for the last 3 years has been higher & in the range of 9 to 9.5%.













Tax Benefit for investing beyond 3 years
For short term returns (less than 3 year), tax impact is same for liquid funds & fixed deposits.
But for long term, Fixed Deposit returns are taxed as per tax bracket of investor which may be 20% or 30% for some investors.
In comparison long term liquid funds returns get indexation benefit & the tax rate is capped at 20% and can never go beyond 20%. Since last 3 years due to higher inflation, the tax has been negligible.
Diversification:
Compared to fixed deposits which invest in the security of only 1 bank, liquid mutual funds invest in deposits of many banks, companies & government securities. This reduces risks & also gives higher returns.
Liquidity:
Many banks charge a penalty on premature withdrawal of Fixed Deposits.
Investor can invest in liquid funds anytime & also withdraw funds any time without any penalty or brokerage. There is no entry load or exit load or brokerage on investment or withdrawal.


Do Liquid Mutual Funds give stable returns?

The graphs show the daily NAV of top 3 Liquid Funds.















Source: AMFI India website



We can see that the returns of mutual funds are very steady, stable & non-volatile for short term as well as long term.


What should an investor do?

Rather than keeping cash in savings account or investing in short term fixed deposits of 1 year, an investor should invest the short term portfolio in Liquid Mutual Funds due to the many advantages & higher returns it offers.
Our online trading account, helps a user to buy or sell mutual funds online at the click of a button and also on phone.
So get a trading account now by clicking here! Registration process is easy & free!

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