Why Liquid Funds are better than Savings Accounts

You can invest in highly liquid government instruments and get your funds back the next business day

Looking for an alternative to savings account which provides better returns with liquidity and safety?One should look at liquid fund as an alternative to a savings account.

What is a Liquid Fund?

A liquid fund invests in highly liquid government instruments. You can invest even for a day and get your funds back the next business day. It offers individuals and corporate investors an alternative (to savings/current account) for parking their surplus cash, for the short term. You could earn nearly 100%more returns than your savings bank account.Check out the comparison here

Saving Bank A/c v/s Liquid Fund-

                    Saving Bank A/c                Liquid Fund

Returns              3.5%(Fixed)             6.5-7% (Not Fixed)

Taxable          Yes above Rs.10,000^              Yes

Instant Liquidity          Yes                            Yes*

^Savings bank interest up to Rs. 10,000 is not taxable.

*Instant Liquidity:  Few liquid funds like Reliance Liquid- Treasury Plan, DSP Blackrock Money Manager and IDFC Cash Fund provide an instant cash / liquidity facility, 24X7 up to Rs. 50,000 or 90% of the current market value, whichever is less. This means that one can redeem and get the funds back within 30 minutes. This facility is available even if you are withdrawing funds in the middle of the night or on a holiday. You can place a withdrawal and go to an ATM and withdraw funds.This facility is only available for Resident individual investors.

Liquid funds also offers Growth and Dividend option. In the dividend option, you have to select the frequency of dividends- daily / weekly/ monthly options are available. However, the dividends are not fixed.

One must also know that Dividends are not taxed directly in the hands of the investor but a Dividend Distribution Tax (DDT) of 28.84% is applicable for units held by Resident individuals, HUFs and NRIs and 34.608% for Domestic Corporates is deducted by mutual fund houses before paying dividends. Ideally, the growth option should be the preferred option for investors.

So, why miss the opportunity cost of 3-3.5%if both the products have similar features!