We work around the clock so hard to earn money but when it comes to money management, most of us are not aware of right options of money management.
After doing away with our fixed deposits or other savings, we keep some cash in our bank accounts for our day to day use.
This cash keeps lying idle in our accounts without yielding any significant returns out of our ignorance of its proper management.
In fact, it yields real negative returns when we take in to consideration the prevailing Inflation rate.
Actual return is the return we get after deducting taxes and inflation from the return produced by an asset.
As the current inflation rate are hovering around 7% and rate of return yielded by the savings bank accounts range between 3.5 to 4%, what we get is negative return of 3%.
It can be turned to positive with little financial management.
We can do it by opting for a liquid fund. So, what is liquid fund?
What is Liquid Fund?
Liquid funds are a type of mutual funds which invest the capital in debt and in other low risk market instruments.
To know more about mutual funds, learn here !
These are very low risk and are assigned as Blue category funds. The returns yielded by these funds vary between 8-9% which is best for our idle lying cash.
Liquid mutual funds are best tool to park your surplus cash for short periods of time (short term investments).
You don’t need to spend a penny to buy or sell these funds as there is no entry load or exit load for these funds unlike we see in other equity funds. When you need your money, you can redeem within one business working day.
In personal financial management, maintaining an Emergency or Contingency Fund is of utmost importance.
You should have at least six months income in your emergency fund which can be used in case of any kind of emergency in your life.
You can not leave it idle in your savings account as it will be attracting meager 4% rate of return.
Also you never know when it gets exposed to any fraudulent transaction in today’s world of advanced technology.
You can neither put it in fixed deposits or any investment as it will dilute the purpose of emergency fund and if you need money, you will have to terminate your investment which may attract penalty if any due to premature withdrawal.
Liquid fund fits best in this scenario giving you higher returns and providing you liquidity at the shortest notice without any kind of charges.[Read more about Emergency Fund]
So understanding the liquid funds is important and using them ideally is important for your finances.
Advantages of Liquid Mutual Funds
Most of the liquid fund asset management companies process the request for redemption within one working day and you get your money in your account in 24 hours.
Hence, it becomes a good option to park your money where redemption and purchasing is done in one business day.
You can use liquid mutual funds like a systematic investment plan to build your savings or an emergency fund.
As we talked above, liquid mutual fund returns hover around 8-9 % with minimal or almost nil risk.
It is still able to beat the Inflation in the long run as compared to ordinary savings account.
Liquid mutual funds are assigned Blue category which means very low risk. The amount is invested in only debt markets where the yield is higher with almost nil risk.
Income Tax Benefits
Fund companies deduct tax before they redeem you the money in the form of Dividend Distribution Tax. All the income you receive from liquid fund investment is tax free.
Liquid funds even score over the fixed deposits when considering the tax deducted at source in case of fixed deposits resulting in higher yields on liquid funds.
Hence, when you may require the cash on short notice you can opt for Liquid Funds.
Like we discussed earlier in case of Emergency Funds, you can keep your one month expenses in your savings account and the other amount in any good quality liquid fund which will also act like an investment.
When the need arises, get your cash in 24 working hours.