There is no harm in maximizing returns, keeping safety and liquidity intact.
The idea of keeping one’s emergency fund somewhere other than a savings account may not strike many, but it is an option worth exploring.
A portion of our surplus money is often kept in a savings account to meet emergency expenses. While building an emergency fund remains core to one’s financial planning, there exist different opinions to safeguard this money.
Undoubtedly, liquidity and safety are more important factors for emergency funds, but there is no harm in maximising returns, keeping safety and liquidity intact.
In this respect, one can explore liquid mutual funds which offer the combination of safety, liquidity, along with better returns than the savings bank account.
REASONABLY SECURE: It is a common practice of corporate houses and high net worth individuals to park their surplus money in liquid funds. However, retail investors have not shown much interest in this option.
For emergency needs, liquidity of money is a must. Investors of liquid funds can redeem money from liquid funds within a day of submitting the redemption application. A mutual fund house is even offering debit card against investments, where one is allowed to withdraw up to 50 per cent of the invested money, which ensures sufficient liquidity.
Since liquid funds invest in money-market instruments such as Government securities, Certificates Of Deposit (CDs), Treasury bills, Commercial Paper (CP) and other debt papers having maturities up to 91 days, the investments are also reasonably secure.
After deregulation of savings interest rates, some new private sector banks have started offering higher interest rates. While the normal savings interest rate in most of the banks is 4 per cent, some banks offer rates as high as 7%.
But a close look at the returns provided by liquid funds in the last 12 months might prompt one to reconsider his decision.
Top liquid funds delivered 9.80-10.50 per cent returns over the past one year, which is far better than what any savings bank account can give. Liquid funds also allow investors to invest for a very short period of time, such as a fortnight, a week, or even for one day. But banks normally don’t allow customers to open a savings account for such short periods.
Another advantage of investing in liquid funds is that the NAVs are declared even on Saturdays and Sundays. After investing a certain amount of money in liquid mutual funds, investors may also opt to systematically transfer the money to an equity fund, which will help them gain from the liquid fund as well as the equity fund.
If the gains from liquid funds can be transferred into equity funds, it will not only provide capital protection but also high equity returns.
TAX IMPLICATIONS: Dividend income from liquid funds is taxed at 27.03 per cent and capital gains tax is also applicable like all debt funds.
The long-term capital gains tax in a debt fund without indexation is 10% and 20% with indexation. Short-term capital gains taxes are levied based on the income-tax bracket one belongs to.
Thus liquid funds can be a good alternative to savings bank account to park one’s emergency fund. Low cost structure, better returns, high liquidity and reasonable safety make liquid schemes attractive to investors, especially over a short-term horizon.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’