Col Sher Khan is a go-getter infantry officer, known for his professional acumen and is a sought-after party animal. He and his family live life to the full. His only Achilles Heel is finance. He routinely has a large amount – anything from Rs 75,000 to even 2-3 Lakhs lying in his savings bank account at any given time, earning 4% savings bank interest. And just because it was lying there, unimportant expenditures would come up and suddenly become urgent and the most important ones to be done then and there. He was fully aware that bank interest is fully taxable and he being in 30% bracket, it practically earned him a mere 4% – (30% of 4%) = 4% – 1.2% = 2.8% interest. He wanted to do something about it but didn’t know what and how.
That’s the time he got introduced to Liquid Funds by a friend. He suddenly realised that he could earn double the interest, have the money safely tucked away so as not to be ‘very easily’ available but still be available at one working day notice through sms, phone call or net login. He started it and found it reduced unnecessary expenditure while not affecting his life-style in any way.
So what are Liquid Funds? Liquid fund is a category of debt mutual fund which invests primarily in extremely safe instruments like certificate of deposits of the banks,government treasury bills, commercial papers of highly rated companies etc. They have no lock-in period and withdrawals from them are processed within 24 hours on business days. The cut-off time on withdrawal is generally 2 pm on business days. It means if you place a redemption request by 2 pm on a business day, the funds will be credited to your bank account on the next business day by 10 am. Liquid funds have no entry load, exit loads and like all mutual funds, have no concept of TDS (Tax Deduction at Source) unlike the bank savings bank or FDs. This implies that you can put in any amount any time, and withdraw any time while the rest of it lying in the fund keeps earning its good interest.
Liquid funds are among the best investment options for the short term during a high inflation environment. Their taxation is as per your tax slab but double the savings bank returns ensure a large additional surplus returns to you. During the past years, some liquid funds have even offered higher returns than bank fixed deposits, which levy a penalty on premature withdrawal.Many fund houses give the option of transacting (investing and withdrawal using your bank account) in them through sms and phone from registered mobile number apart from the internet, thus bringing your money to your literal fingertips! One fund house even gives an ATM card for withdrawing up to about Rs 50,000 from bank ATMs.
Finally, what should you use your Liquid Fund for?
- Surplus money which earns practically nothing, lying in your savings bank account.
- Money you leave in bank account catering for EMIs or instalments over next few months.
- Sales proceeds of your previous house/flat till you invest in new one.
- Funds created for your child’s education /marriage till you use it.
- Lump sum amount lying in your bank account which you may be required any time
- Large amount of money lying idle over long weekends whether your own or the company’s. Example: Rs 1 Cr kept for one day will earn about Rs. 2200 per day as per current Liquid Fund returns. This means, this happening over weekends throughout the year in your company will earn you Rs 2,28,000 (salary of one person?).