Mutual Fund Investment for Higher Returns.

Why keeps money Idle?

The common traits among investors are to let big sums of money idle in a bank account. Whether it’s because of laziness, procrastination or ignorance of liquidity management products, most salaried and self-employed investors keep large amounts of money in their savings or current account.

Why not consider liquid mutual funds.

Banks give you 3.5% return from a savings account, or 0% in a current account. If inflation is 5%, you essentially earn negative returns on cash in the bank. It is important to consider liquid and liquid plus mutual funds, which manage short-term cash surpluses but yield comparatively high returns. They are also called cash management funds.

What is Liquid Funds?

Liquid funds are essentially money market mutual funds which invest in money market instruments like treasury bills, commercial paper, certificates of deposit, call money, and so on. Money market instruments are generally of very good quality, as assessed by various rating agencies. Money market instruments are forms of debt that mature in less than a year, that is, they are liquid.

Short-term interest rates

The maturity of money market instruments in a liquid fund’s portfolio is of short duration—generally up to six months—and hence free from fluctuating interest rates and securities prices. Liquid fund returns mirror short-term interest rates.

Liquid plus funds

Liquid plus funds are debt-oriented mutual funds which invest in money market and short-term debt instruments like floating rate notes, non-convertible debentures, partly-paid debentures, pass through certificates, and so on. Hence liquid plus funds give returns that is slightly higher than those of liquid funds.

Consider Taxation.

Liquid and liquid plus funds differ on taxation. Liquid funds are money market funds, so dividend distribution tax is 28.33% for all investors, individual or corporate. Liquid plus funds are debt funds, so dividend distribution tax is 14.16% for individuals, and 22.66% for corporates.

High liquidity

Because of the high liquidity, liquid and liquid plus funds are a convenient parking spot for your money if you are not ready to make an investment, or may need the money in the near term, or are sitting on a pile of cash. They are ideal for risk-averse investors, and popular with institutional investors.

Good Liquid Funds.

There are number of attractive and impressive liquid funds. ICICI Prudential Liquid Fund, Birla Cash Plus, HDFC Liquid Fund, Reliance Liquidity Fund and UTI Liquid Fund have been consistent performers in their category.

Crisil Liquid Fund Index

Liquid funds have fared quite well, beating their benchmark, Crisil Liquid Fund Index, across all time frames. Liquid funds have, on average, delivered annualized returns of 8% on a three- to six-month time frame.

Refer and Read Economic Times of India for many more detaied articles.

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