MAXIMISE
YOUR RETURN ON "IDLE" FUNDS :
Suppose
you get your Salary/Rent on the 1st of every month.
It
is unusal for you to have your entire months expenses on the 1st
itself. The expenses will be staggered and spread throughout the
month.
Ex
Mobile
bill on 5th
School
Fees on 10th
Credit
Card on 15th
EMI
on 20th
Monthly
SIP on 25th
Till
these expenses come up, you tend to lock your money in Bank wherein
you are getting 4% (yes, some banks do offer 6% for Saving Bank
Account, but these rates come with lots of conditions like balance of
more than 1 lakh)
So,
when I consider 4%, you are better off investing in Liquid Funds
where returns match 1 year Fixed Deposits. Right now, even the
underperforming liquid funds have been giving 8%, which is DOUBLE the
rate of Saving Bank Deposit.
Another
Advantage of investing in Liquid Funds instead of keeping in SB
account is that Liquid Funds are in true sense “liquid” that is,
you get your money within 24 hours and whats more some AMCs also
offer ATM Card for your investment which you can use to withdraw
money anywhere, anytime.
Theoretically
speaking Liquid Funds are not Capital Safe but Liquid Funds invest in
Money Markets, Short Term Corporate Deposits and Treasury and hence
very liquid and very safe as all these instruments have very low risk
and enjoy high liquidity.
Open Ended
- Debt: Liquid - one Year Return
|
||||
Fund |
NAV
(Date)
|
Returns(%)
|
Return
as on
|
|
Escorts
Liquid
|
18.52 (3-Jul)
|
9.78
|
7/3/2013
|
|
Principal
Retail Money Manager
|
1,345.26 (3-Jul)
|
9.46
|
7/3/2013
|
|
Peerless
Liquid Super Inst
|
13.12 (3-Jul)
|
9.13
|
7/3/2013
|
|
Tata
Liquidity Management Plan A
|
1,619.69 (3-Jul)
|
9.08
|
7/3/2013
|
|
Taurus
Liquid Super Inst
|
1,293.96 (3-Jul)
|
9.07
|
7/3/2013
|
|
Kotak
Floater ST
|
1,964.69 (3-Jul)
|
9.05
|
7/3/2013
|
|
Indiabulls
Liquid
|
1,166.53 (3-Jul)
|
9.05
|
7/3/2013
|
|
ICICI
Prudential Money Market Reg
|
165.95 (3-Jul)
|
9.04
|
7/3/2013
|
|
Templeton
India TMA Super Inst
|
1,785.54 (3-Jul)
|
9.03
|
7/3/2013
|
|
Birla
Sun Life Cash Plus
|
192.10 (3-Jul)
|
9.01
|
7/3/2013
|
|
Returns
Chart as on 4th
July 2013
Another point to note is that since
Savings Account Interest is de-regulated, the interest on SB Accounts
also vary and is not fixed. Which
means now if the bank has set the interest rate at 6%(increasing
interest rate scenario) .It can also reduce below 3.5% also when
interest rate dives low.
My personal feeling is, there will always be a gap of at least 1% in Favour of Liquid Funds compared with SB account.
My personal feeling is, there will always be a gap of at least 1% in Favour of Liquid Funds compared with SB account.
TAX
ANGLE :
Recent
hike in Dividend Distribution Tax to 28.3% (including Cess &
Surcharge) may make many wonder SB Account with its upto Rs.10000/-
Interest as Tax Free a better option.
I
beg to differ for 2 reasons.
- The Average returns of Liquid Funds has always beaten SB Account Interest by a minimum of 1%
- True, Dividend on Liquid Funds are taxed at 28.3% but Interest on SB interest is added to your overall Income and is taxed as per Tax Slabs.
- Interest on Liquid Funds is paid out on Daily basis where Interest on SB Account is paid on Quarterly basis.
- There is no charges by AMCs if minimum balance in Liquid Fund goes below the prescribed minimum balance, whereas Banks charge anywhere between Rs.50 to Rs.1000.
So,
if you an investor who comes under High Tax Bracket of 30%, you are
advised to go for Dividend option wherein your Capital Gains is
nullified and if you are in Lower Tax Bracket, you can go for Growth
option and take the advantage of Indexation to reduce your Tax Outgo.
Prudent
financial planning says that an investor should have some Contingency
fund to face any Emergency situation in Life. So, keep cash at home
and the balance should be divided in SB Account and Liquid Fund
depending on your requirements.
I
normally advise investors to keep 1/3rd
of Contingency Fund in Liquid Funds.
After
all, an 8% return with 1 day Liquidity is always much better than a
4% in SB Account!
Caveat
: Do not use Liquid funds for Investment use them purely for parking
your Temporary money.
Also visit http://equityadvise.blogspot.com
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