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How to Get Higher Returns with Liquid Funds

By Chanel Rick - Nov 6,2022
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Day after day, the hustle of daily life never ceases to exist. Remember those early mornings before heading off to work, wishing for just 5 minutes more of sweet sleep? You would force yourself out of bed, hoping for the glorious payday to arrive sooner. And then what? Once it’s here, your salary is split between recurring payments like rent or home loans, credit card bills, utilities, etc. 

After the budget for the month is created, leftover savings from the previous month are deposited in a savings account. But, wait, is that really the best use of those savings? All those early mornings out of bed and late nights at work couldn’t possibly result in such low earnings. Fortunately, that doesn’t have to be the case for you.  

Let us stop you before you try to complain about the complexities of investing. Yes, it can be a learning curve for some. And, no, it’s not all risks and losses. Choose from stable and secure investment opportunities as per your risk appetite and financial goals! Moreover, the sooner in life you start investing, the more high-risk investments you can indulge in. 

However, that’s not a necessity for novice and low-risk investors. Instead of diving head-first into high-risk investments, start off with easy-to-liquidate schemes. It will serve as a great alternative to a moderate interest-earning savings account! 

Understanding Liquid Funds 

It’s 2022, and investing in low to moderate or high-risk schemes is no different than any other trending fad. Whether cryptocurrency or mutual funds, there are scores of people interested in exploring these investment avenues. But, others seem reluctant to part with their savings, fearing the worst and believing common misconceptions.  

For individuals that would like the safety of savings accounts but the excitement of mutual funds, liquid funds are a viable option. They are debt-based mutual funds that invest in debt securities with short-term tenures. Also, these schemes have fixed returns without much involvement from market volatility.  

The debt securities consist of treasury bills, commercial papers, and certificates of deposits. The tenure can go up to 91 days, but investors can choose to invest for an extended period or re-invest the gains earned. As the name suggests, these funds offer investors the benefit of ease of liquidity. These funds can be quickly bought or sold and converted to cash.  

Who is it for?  

Now, the attractive benefit of liquidity and increased cash flow will invite the attention of several investors. While anybody can invest in them, some investors will benefit more. So, investors looking to park their windfall or idle savings for a short-term period can opt for liquid funds. The tenure can be for as little as a few days, weeks, or months. Moreover, it’s a great way for investors to secure emergency funds.  

Weighing Options: Liquid Funds Vs. Savings Account 

Being sceptical is part of our human nature, but don’t let that rob you from exploring new territories. While nothing can replace the humble savings account, explore your options. Also, you can decide to invest in both! If you plan to stash your savings in either one of the options, choose what suits your finances the best.  

Here’s a quick comparison between liquid funds and savings accounts.  

Accessibility 

Liquid Funds: Investors can easily transfer funds through online banking platforms like mobile apps and online websites. It makes them convenient and quick, without requiring a physical visit to the nearest bank branch. 

Savings Account: Those with idle funds must physically visit the nearest bank branch to deposit the money into their respective account.  

Utility  

Liquid Funds: Ideal for investors who want to invest their savings in easy-to-liquidate schemes for higher interest earnings. 

Savings Account: They’re preferred by investors who wish to store their earnings in a secure bank account. 

Tax  

Liquid Funds: Investors are liable for Short-term Capital Gains tax, which will be calculated based on their tax slab. 

Savings Account: Returns earned via the nominal interest rate are taxed based on the investor’s tax slab. 

Like the idea of investing in liquid funds instead of depositing your cash in a savings account? Then there are a few reasons why that might benefit you!  

  • There is no exit load or penalty levied on withdrawals  
  • Certain fund houses offer ATM cards to investors for easy withdrawals 
  • Some liquid funds provide higher interest rates than a regular savings account  

Lastly, you might wonder whether there are any risks associated with liquid funds. After all, they’re a form of mutual fund that allows investors to invest their savings in debt securities. While these funds offer the lowest risk among most debt schemes, there are some interest rate and credit rate risks.  

As long as you abide by the rule of responsible financial behaviours and frequently exercise these practices, there’s nothing to worry about! Before investing in liquid funds, weigh the option between them and a savings account. Or better yet, consider both! Depending on your financial conditions and goals, one will benefit you more than the other.  

So, have you begun your investment journey yet? If not, it’s never too late! Start investing in fixed deposits for stable earnings or diverse mutual funds on Bajaj Markets today. 

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