If you are a person who thinks savings bank accounts is better way to save and park sums for any unforeseen needs than their is better alternative available for you which not only gives you more returns but sometimes double in respect to what you get in Savings Bank Account.
The answer is Liquid Funds
What is a Liquid Fund?
This type of fund is typically an open-ended debt scheme which invests in short term money market instruments such as treasury bills, short term corporate paper etc of up-to 91 days.
Here, an investor has the option to park one’s fund for few days or months and earn returns for the holding period as per market rates. Also, there is no exit load applicable for such a fund. Liquid funds are available in various variants such as Daily Dividend, Weekly/Monthly Dividend and Growth option.
In spite of the de-regulation of interest rates for savings bank accounts announced by the Reserve Bank of India, only a handful of banks offer 6-7% interest on a savings account, most still offer just 4%. Switching to another bank is a bother and also, there is no guarantee that the bank will keep offering such a rate. A smarter move would be to consider a good liquid fund.
There are many options available in the market.Some of the recommended plans according to Crisil rating are as follows-
ICICI Prudential Liquid Plan
Indiabulls Liquid Fund
JM High Liquidity Fund
DSP BlackRock Liquidity Fund
Liquid Funds also have the advantage of tax-efficient returns when compared to savings bank account. Here, the long-term capital gains are taxed at 20% after indexation, while short term capital gains are added to your income and taxed at the normal rate applicable to you. The tax structure renders a significant benefit, especially for those in the higher tax bracket.
Since the instruments in such a portfolio have a maturity period of less than 91 days, the interest rate risk does not exist to the tune it does in other debt funds. Moreover, the fund managers tend to stick to a high credit rating to maintain a very high quality portfolio which makes it less susceptible to default risk.
When it comes to redemption, the investor can simply place a redemption request and the money accumulated gets credited to ones bank account the very next working day. In case if there is a weekend in between, the money will be credited on a Monday.
Looking at all the parameters, liquid funds make for a strong case. If you still feel that you do not want to take such a risk, start by placing a part of your cash in liquid funds and the balance in your savings account.