Why Liquid Funds Always Runs Ahead of Bank Savings Account?

Savings account

Saving accounts are one of the most popular deposit accounts for individuals. In Saving Accounts, the depositor is normally issued cheque books,a Debit card and the customer is allowed the flexibility of deposits of any amount and withdrawal of the same whenever they required irrespective of time. Although, rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal varies from bank to bank relies on the RBI announcements and other factors. Interest rates for savings account can be decided the banks itself under certain conditions imposed by RBI and varies from 4-7% per annum.

What is Liquid fund

Liquid fund belongs to the category of mutual fund which invests mainly in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits with a residual maturity of upto 91 days.

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Objective of Investment

To enhance income consistent with a high level of liquidity, via money market and debt instruments.

Who can Invest

Liquid fund is suitable for investors who looks for:
1.Short term income
2.Debt and money market instrument investments
As liquid fund have a low level of risk,blue color code is assigned as per the specifications by SEBI.

How to choose a liquid fund

Three factors are considered to screen a liquid fund.

1. Size of the fund
2. Quality of the underlying securities
3. Record of the fund house

Leading factors of liquid funds over Bank savings account

The following factors explains why one should choose liquid funds over Bank savings account

1.Returns

The best opportunity for the individual to invest in liquid funds is the high inflation period. As RBI keeps interest rated higher and tightens the liquidity an investor can enjoy the good returns in this period.

The following table shows what liquid fund has raised the yearly returns

Note : Returns in %

2.No lock in period

• Withdrawal of money : 24 hours of request.
• Cutoff time for withdrawal : 2 P.M
• Request after 2PM : processed at 10 AM next day
• No entry and exit loads

3.Risk

Liquid funds are highly low risk. Maximum maturity of the instrument may extend upto 91 days but even can close in six or eight days also.Liquid funds are not traded in the market but held to maturity by the fund which in turn strips the losses and throws off volatility.

4.Plans as per individuals’s needs

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. Investors can the option to select their plan as per their convenience and liquidity needs.

5.Taxation

• Dividends via liquid funds are not taxed to the resident individual investors but fund houses pay dividend distribution tax at 28.325%.
• Individual investors who gains before a year on their investment in liquid funds are taxed according to their income slabs.And samething is applicable in savings accounts are also.

Top 5 Liquid funds as per CRISIL rankings as on 3rd,July 2015

Note : Returns in %

Conclusion

So generally one can invest 60% of their principal in liquid funds and 40% into savings account which helps everyone to meet their unexpected requirements. An investor can decide their required proportion of investing as per their necessities.