Saturday, July 6, 2013


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.
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
 NAV (Date) 
 Return as on

 Escorts Liquid
18.52  (3-Jul)

 Principal Retail Money Manager
1,345.26  (3-Jul)

 Peerless Liquid Super Inst
13.12  (3-Jul)

 Tata Liquidity Management Plan A
1,619.69  (3-Jul)

 Taurus Liquid Super Inst
1,293.96  (3-Jul)

 Kotak Floater ST
1,964.69  (3-Jul)

 Indiabulls Liquid
1,166.53  (3-Jul)

 ICICI Prudential Money Market Reg
165.95  (3-Jul)

 Templeton India TMA Super Inst
1,785.54  (3-Jul)

 Birla Sun Life Cash Plus
192.10  (3-Jul)

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.


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.
  1. The Average returns of Liquid Funds has always beaten SB Account Interest by a minimum of 1%
  2. 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.
  3. Interest on Liquid Funds is paid out on Daily basis where Interest on SB Account is paid on Quarterly basis.
  4. 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.

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