Quite recently I heard a nearby Sweets Shop Owner complaining on the reduced savings bank account rate offered.A meager 3.5% p.a. that’s it!! What will I really do with it as he muttered? Will I be really able to earn or make anything out of it? Well, this question plagues most of us as with the ever growing inflation rates — do we really do anything with this idle money lying in our bank account? Do we?
There lies a charm in savings bank account. The flexibility to call your money at will. There is instead a peace of mind and this has got to do more with ones psychology since decades. But do not forget that it comes at a cost as the money lying idle in your bank account earns you a low rate of interest? So what’s the way out? Is it possible to earn superior returns as well as get instant liquidity? Yes, it is possible if you invest/park your short term money into a liquid fund.
In the past 2 years or so the debt funds would have given the savings bank account a run for their money as the returns offered were somewhere in the range of 8% mark up. Though such returns won’t be sustained in the near future but even if one earns a 6% return by keeping their money into a liquid fund you are practically earning more than 50% money as compared to a savings bank account (offering currently 3.5%) so what’s the harm? A Liquid fund is considered to relatively be safer form as they do not invest any part of assets in securities with a residual maturity of more than 91 days. The average portfolio maturity of this category ranges between four and 91 days. These funds invest in short-term debt instruments with maturities of less than one year. Investments are mostly in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between 3 and 6 months. They tend to least riskiest form of funds and the money is almost readily available if you have a smart phone which enable you to redeem instantly. By 2 to 3 clicks your money is ready to be withdrawn from the liquid fund account and it gets instantly credited to your bank account by some AMCs or the very next day.
On the taxation part for small investor do not enjoy such benefits as all such redemption within 36 months of your investments are treated as short term capital gain only but then if you are earning 50% more than your savings bank account is there harm? Consider you have 2 lakhs in a savings account which earns you 7,000 in a year (@ 3.5%) while a liquid fund would give you 12,000 in a year growing at a moderate rate of 6%.
Also liquid funds can be used strategically to meet your very short term goals like paying tuition fee for your child or a down payment for your car/School Annual fee or some other short term needs. So think again and make your idle money work harder after all its your money.
Simplified Money Talks 