Monday, 20 June 2016

Liquid Funds - Better Alternative to Savings Banks Account

Liquid Funds are ideal parking spot for your surplus cash

Mutual fund schemes known as liquid funds /money market funds/cash funds and ultra short-term bond funds/liquid plus funds are ideal options for corporates & investors like you for parking funds for the short term. They allow for a high degree of liquidity, safety higher returns & ease of transaction. They are alternatives to keeping money in a savings bank account/current bank account or a short term bank fixed deposit.
Liquid mutual funds, as name suggest offers liquidity plus good returns at the same time.
Basic features of liquid/liquid plus mutual funds:
  • Open ended debt mutual funds 
  • Their investment predominantly is in very short maturity debt instruments with a residual maturity of 30 days to 18 months.
  • No exposure to equity.
  • Regulated by SEBI
  • Less prone to market risk : No or very little possibility of loss
  • Easily Redeemable within 24hrs.
  • Zero entry/exit load – Except in some liquid plus schemes.
  • Offers good post tax returns.
  • High yield in current scenario- Current yield range- 8-10% tax free
  • No TDS
  • Dividends are tax free in the hands of the investor. 
  • Indexation benefit for units investment above one year. 

Features of Liquid Funds

  • Works like a current/saving bank account-absolutely flexible.
  • One time account opening. Later use of simple transaction form plus cheque or the process can be done online with direct payment/RTGS. 
  • No need to have multiple accounts / folios – Can deposit/redeem (withdraw) any no. of times, even daily.
  • In liquid funds, purchase is T-1, i.e., cleared funds are given to the AMC by the cut-off time of 2 pm and availing of previous day’s NAV. Redemption is T+1, i.e., the redemption request is placed within the cut-off time of 3 pm and the proceeds are received the next day.
  • In Ultra short-term /liquid plus, purchase is on a T+0 bases, i.e., that day’s NAV would be applicable. If the amount is more than Rs 1 crore, clear funds have to be given to the AMC by the cut-off time of 3 pm, otherwise the NAV of the day on which clear funds are being given will be applicable. Redemption is T+1 for USTBs as well. For both fund categories the application should be submitted and time stamped at the AMCs’/RTA’s office within the cut-off time.
The investor can invest in either the growth or dividend option. I would suggest dividend option for less than one year investment & growth for more than 3 year investment to get more tax efficient returns.

Generate Income from Weekend Parking

The advantages of liquid funds are that they provide stable returns and T-1 purchase. Another advantage is the declaration of NAVs on Sundays/holidays as well, which means redemption request put in on Friday (within the cut-off time) for proceeds on Monday would be at Sunday’s NAV. Ex. On investment of 1cr on Friday before 2pm & redemption same day before 3 pm. Investor will earn tax free interest for four days i.e. Thursday, Friday, Saturday & Sunday otherwise this fund would have been idle in current account for four days. Investment amount will be credited to the investor bank account on Monday before 11am.

For a horizon of more than two weeks,(ideally2-4months)investors can avail of the relatively higher returns and tax efficiency of USTBs and for a short horizon of a few days/.weekend parking liquid funds are safer.

It is also true that liquid fund returns are currently almost as high as fixed deposits. But do not go by these returns. When interest rates fall liquid fund returns will also fall a bit but remain higher than savings account rate. In such a case, it is still possible that Fixed Deposit rates will be superior. Liquid funds are not made for investment but instead parking money temporarily. If you want funds comparable to FD, you should go for Monthly income funds

Tax Advantages of Liquid Funds vs Bank Fixed Deposits

Liquid Funds has an advantage when compared to similar investments like Fixed Deposits (FDs). In FDs, Interest earned is added to your income and taxed at your income tax rate. Interest from FD is categorized as "Income from other sources" as per the Income Tax Laws.  In the case of Liquid Funds, tax implication depends on the investment option chosen Dividend or Growth

Which option to choose ?

Dividend  Option : Dividends  in  Liquid Funds  are  tax  free in  hands  of  investors but Mutual  Fund companies  have  to pay  a 28.33% Dividend  Distribution  Tax  (DDT)  including surcharge and cess and  30%  plus  surcharge  and  cess  for others  (33.99%)  before distributing it to you as investors

Growth Option : If you opt for Growth option, it is subject to Capital Gains Tax. Short Term Capital Gains (if units are held for 36 months or less)  are taxed as per the Income Tax Slab Rate of investors. For Long Term Capital Gains (if units are held for more than 36 months) are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability, which is not the case of FD.

How i generate income with Liquid Funds

To give you a practical example how i do generate excess money from Liquid Fund is , My Salary gets credited on 1st of every month in my bank account , Immediately i pay the money towards Utility bills etc & withdraw funds for household expenses. Rest of the money is shifted to liquid funds, i have car loan EMI & SIP, nowadays you don't need to remember about EMI & SIP as you receive SMS. On receiving SMS i redeem the liquid funds up to that extent and amounts automatically gets credited in my bank account.
Imagine if the same money would be lying in savings bank account then i would be earning a mere 4% interest where as parking the money in liquid funds i am earning somewhere between 8 - 8.5%

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