It pays to put money in liquid funds

Small investors are still wary of investing in liquid funds and prefer to park their money in savings bank accounts.

This, despite the fact that these instruments give average returns of 7-8% and post-tax returns of 6-7%, way more than the 4% one can get on savings bank deposits (see table).

Among others, Pramerica liquid fund gave a return of 8.9%, compounded annually, followed by AIG India liquid fund with 8.67% and Reliance liquid fund with 8.65%.

“Investing in liquid funds in the current scenario is highly beneficial for retail investors as they offer much better tax-adjusted returns than a savings bank rate,” says Dhawal Dalal, senior vice-president & head—fixed income, DSP BlackRock Mutual Fund. “In spite of liquid funds giving better returns, some people are still wary of investing here because it’s linked to mutual funds and a lot of times investors are not aware of this option and the returns it gives,” says Arjun Parthasarthy, editor of www.investorsareidiots.com.

There’s more reason why an investor should consider putting his idle cash in liquid funds.

For one, Reliance Mutual Fund has launched Reliance Any Time Money Card for unit holders of Reliance Liquid Fund. The company claims unit holders of this fund can earn higher returns than possible on money parked in a bank account.

This will be similar to a debit card that the card holder can use to make any kind of electronic and online payment. The card is co-branded with HDFC Bank.

“The card will help investors earn on idle money every single day and will help them earn a daily dividend, too,” says Sundeep Sikka, president & CEO, Reliance Capital Asset Management Ltd.

The company settles the units on a daily basis. If a person uses the card linked to his liquid fund account and makes electronic payment of amount X, the fund house will deduct the investible amount from his fund and allocate units accordingly.

The initiative is expected to attract people who have been reluctant to invest in liquid funds for fear of non-availability of funds when required immediately.

“This is a unique service, which will promote the concept among retail investors. The only drawback is, the person will not be able to write a cheque through this service,” says Suresh Sadagopan who runs Ladder 7 Financial Advisory Services.

“Investors who fall under a higher tax bracket should definitely take advantage of liquid funds as one can get indexation benefits, too. Since there is no lock-in period, one can withdraw funds easily, without any hassle,” said Raunak Roongta, a Mumbai-based independent financial advisor.

What’s more, it’s easy to invest and redeem from liquid funds as they are able to credit their redemption proceeds straight into investor’s bank account the very next day, says Roongta.

According to the experts, if one parks the money idling in his savings bank account in one of the better performing liquid funds, it will generate returns close to 9%. Thus, even after deducting a dividend distribution tax of 13.54%, the returns would be in the range of 5-6% — at times even more than 7% — which much higher than the post-tax returns a savings bank account gives.

But investor awareness remains an issue. And considering liquid funds are flooded with high networth individual (HNI) and institutional money, there’s also a caveat for investors —- do your homework before taking the plunge and do bear in mind the risks.

“Institutional investors and HNIs do invest in the liquid funds more often than retail investors due to their better understanding of the subject,” says Dalal.