Savings bank account earning you a measly rate of 3.5 per cent is bad for your financial health. Donâ€™t let your money languish here. Instead, transfer this money to a liquid fund. This scheme type is as liquid as a savings account and yet, offers you better returns.
Looking at bank savings account passbook or at the latest bank account statement there will be a significant amount lying in the savings account, which is earning a very modest 3.5 per cent while waiting for drawing it out for everyday needs. Do you realize how much you end up losing because of this? There is a far better investment option than savings account. This is liquid funds.
A liquid fund is a mutual fund scheme that invests primarily in very short-term debt (i.e. bonds, debentures, fixed deposits, commercial paper, etc.) and the money market. The average portfolio maturity (i.e. the average tenure of all the debt investments held by the scheme) of these schemes ranges from 1 day to 256 days.
As the name suggests, these funds are very liquid (you can receive your redemption proceeds within the same business day or at the most, the next business day). Some mutual funds offer â€˜ATM cardsâ€™ to their liquid fund investors, which permit them to withdraw from their liquid funds through ATM counters.
One does not need to have a significant amount of investment to have access to liquid funds. The minimum investment amount in liquid funds can be as low as Rs 500.
Liquid funds offer a number of advantages over savings bank accounts. Some of these are:
Overcoming interest rate risk:
Money lying in savings bank account earns you 3.5 per cent, irrespective of which way interest rates are moving. In the current rising interest rate scenario, it is simply languishing at this dismal rate. Liquid funds have given returns of 6.10 per cent over the last one year period. This is almost double of the 3.5 per cent earned on savings account.
Variable income. While savings account offers a fixed rate, the returns offered by liquid funds vary on two counts. The first is due to the change in interest rates and the second is on account of trading carried out by the fund manager in the debt markets and inter-bank call money markets. Debt fund managers attempt to earn an â€˜extra bitâ€™ by trading in debt paper in these markets. This possibility is absent in case of your savings bank account.
Interest earned on savings bank account attracts tax at the rate applicable to your total income. For instance, if you fall in the highest tax bracket i.e. 30 per cent, where surcharge is applicable to you, your tax rate works out to 33.66 per cent (30 per cent tax + 10 per cent surcharge + 2 per cent education cess). When you take this into consideration, you are left with a measly post-tax rate of 2.32 per cent (3.5 per cent â€“ 33.66 per cent of 3.5 per cent). Mutual funds score against this since dividend earned on mutual funds is tax-free in the hands of the investor. It is true that the mutual fund has to pay Dividend Distribution Tax (DDT) of 14.025 per cent before paying out the dividend, but this rate is higher than only the lowest tax rate for individuals (the lowest tax rate for individuals is 10.2 per cent).
Saving bank accounts are passÃ©. Donâ€™t leave your precious money resources to go â€˜into comaâ€™ in a savings account. Make them work for you by placing them in liquid funds.