Insights

Liquids funds – A supplement to your savings bank account

February 9, 2013 . Vidya Bala
Taxation for debt funds changed since this article was published. Please read our blog article on debt fund taxation to update yourself about changes from FY-15.

Have you been idling large sums in your savings bank account just to provide for any unforeseen need? If so, you could have managed 5-6 percentage points more by setting aside at least a part of your money in liquid funds and still have liquidity.

Yes, liquid funds, offered by mutual fund houses, invest in short-term money market instruments such as government securities, treasury bills and commercial paper. In a way, they park your money in instruments not too different from the way banks do and hence are reasonably secure. On the flip side, they cannot provide you fixed returns the way savings bank accounts do. They do not also offer a deposit insurance of up to Rs 1 lakh that your balance in savings and deposit accounts enjoy.

And yet, their returns, as the table below suggests, have been far superior to savings bank rate. Although saving bank rates have been deregulated by the RBI, only couple of banks offer 6% to 7%. The rest give you only 4% currently.

liquid fund chart

Features of liquid funds
• Invest in short-term government securities and certificate of deposits, making them reasonably secure
• Provide flexibility to invest or withdraw any time without any exit load or penalty.
• Some mutual fund houses even offer an ATM card to withdraw the funds
• Tax efficient schemes
• Have historically provided higher returns than savings bank interest rate

When to use
• To create an emergency fund which can be withdrawn any time
• To temporarily park any lump sum you may have received
• To save for short-term goals such as saving for an impending vacation or for short-term obligations
• To park money and systematically invest in other high yielding schemes such as equity funds

How to plan
Segregate the money in your savings account into two: one, the sum that you need for your day-to-day operational cash flows and the rest for contingencies or for a short-term goal. Let the first part remain in your savings account as you need this for your daily expenditure. Shift the rest to a liquid fund. If you have a time frame of over 3 months then you can consider ultra-short-term funds as well. This can give you slightly higher returns than liquid funds.

Being tax efficient
Did you know that you need to pay tax on the interest that your savings account balance fetches? Yes, such interest income is taxed at the tax slab in which you fall – 10%, 20% or 30%. Liquid funds too, are taxed (as capital gains) in the same rate if held for less than one year (indexation benefits are available for holdings greater than one year).

But you can plan to reduce the impact of capital gains tax in liquid funds. Here’s how: if you are in the high tax bracket of 30% opt for dividend payout or daily dividend reinvestment. This will reduce or nullify your capital gains. If you are in the lower tax bracket, you can instead take the growth option since the tax rate is anyway low.
Corporate houses have been using liquid funds to park their daily surpluses and derive some returns. As retail investors, you can take also benefit from these schemes.

Birla Sun Life Floating Rate Short Term Plan, DSP BR Liquidity and HDFC Cash Management Savings Plan are some of the liquid funds that you can consider.

94 thoughts on “Liquids funds – A supplement to your savings bank account

  1. Hi Vidya,

    Hope you are doing good. I was planning to invest in liquid funds just when I received your post.

    You just mentioned abut some liquid funds which someone can consider. I just checked there performance on moneycontrol site and found out that for eg “Peerless Fund” is the one which still hasent been rated. What should be the thought process while deciding upon the best liquid funds.. My thought process was to look at the top ranking liquid funds (for eg ICICI Pru Liquid plan and go with it. Your suggestions/considerations have put me in a bit of dilemna. So would you be so kind to just give some pointers how to decide b/w funds.

    1. Hi Rohit, Thanks for your query. We choose funds based on all or some of the following aspects: returns, maturity period (of underlying instruments), asset size of fund and whether SIP is available on the fund. In this aspect, Peerless Liquid had a very low tenure, making it a very safe bet. It is because of this low tenure that its returns are also lower. Some funds we suggested had a slightly higher tenure and therefore higher returns. For instance, Birla Sun Life Floating Rate Short Term is an example. While tenure may not seem important to you as you have liquidity, it is important from an angle of safety. So we have provided a basket of such funds. You may choose the other funds for slightly higher returns.
      Also, with liquid funds, the rating you see may be extremely dynamic as ratings will vary even based on short-term returns. You may choose them based on your need. If your need is simply to park money for a while, chose the top ones. Or if you are using a liquid fund to make investments (STP) in to other funds in the fund house, take the one that is available in the fund house and has a reasonable record. – Tks, Vidya

  2. are LF better than the Flexi deposits offered by various banks where the idle money sweeps in to and out of the FD’s automatically created by the bank over and above a threshold limit specified initially by the account holder?

    1. Hello Mr Mohan, you have taken a good example. Yes, flexi deposits allow sweep in and sweep out of money when they touch a set threshold. Hence, the liquidity is better compared with regular fixed deposits. But when it comes to earning returns, it would entirely depend on whether your fixed deposit money remains intact or keeps coming back to your savings account. If it remains intact, it is likely that the returns will be superior to liquid returns pre-tax. If it is only temporarily parked, much would depend on the duration of the deposit. Hence, the return scenario will keep varying. Also liquid funds, as we stated in the article are more tax efficient than the tax on deposit/saving account interest income.
      But if you do have a flexi deposit, where your deposit remains intact and does not get transferred to savings account again (during deposit tenure), you should not be comparing such a fixed deposit with liquid funds. They should be compared with income funds. Look out for our posting soon on a comparison between income funds and fixed deposits.- Vidya

  3. This seems to be a nice option for me. Is it possible to invest on these funds from my existing FundsIndia account? And also where i can check all the available options in this category?

    1. Hi prasanna, you can invest in liquid funds through fundsindia. Login to your account and click Mutual funds) in the black panel at the top. Choose new investment and go ahead and choose liquid funds and then the fund of your choice. You can also refer http://www.fundsindia.com/top funds to look at our top picks across various fund categories. Liquid and ultra short-term funds will be available in the less than one year holding. In case of ultra short-term funds, check scheme details as some of them will have exit load. – Vidya

  4. I understand only that if cash is ideal in SB account than only liquid fund is good. but comparing FD’s its return almost same or less.

    still asking if i am getting 9% in Bank FD , Which liquid fund is good to invest for near by return?

    1. Hi Vihar, it is true that liquid fund returns are currently almost as high as fixed deposits. But do not go by these returns. When interest rates fall liquid fund returns will also fall a bit but remain higher than savings account rate. In such a case, it is still possible that FD rates will be superior. Do not use liquid funds for investment. Use them for parking money temporarily. If you want funds comparable to FD, you should go for income funds. – Vidya

      1. dear mam
        i have query regarding liquid fund and income fund.?
        which one is better?
        for a lump sum investment in liquid fund of any fund catagory i can take any sip from the other fund or i have to select same fund sip for stp?
        what is best liquid fund and sip for 2 to 5 yrars?

        1. Sorry for the delayed response. Which fund is better depends on your time frame and requirement. If you are going to do STP, then invest in liquid funds and move them to the funds chosen. the ‘from’ fund and ‘to’ fund have to be from the same fund house. thanks, Vidya

  5. Can u suggest some schemes / mutual funds to park lumpsum for a period of 12 – 18 months..I am already a subscriber of fundsindis. Can I invest through the same login ??

    1. H Kalyani, Birla Sun Life Floating Rate LTP, Templeton India Low Duration (this fund has an exit load if redeemed within 3 months), or Templeton India Short Term Income (exit load if redeemed within 270 days) and JP Morgan India Short Term Income (exit load if redeemed within 6 months) are good options to earn returns slightly higher than liquid funds. You may choose these funds if you can hold for at least 12 months as most of them suffer exit load barring Birla Sun Life Floating Rate Plan LTP.
      Yes you can very much invest online through FundsIndia if you are a activated user (first time application signing is done)- Vidya

  6. Dear Madam,

    You please be suggest, I am having a ULIP in ICICI PRU LIFE “FUND NAME SFIN* R.I.C.H. FUND II ULIF 049 17/03/08 LRICH2 105” since nov 2008, now its NAV 14/-. I want to switch another good scrip in ICICI PRU LIFE.

    Please suggest good returns scrip madam.

    1. Hello Satya, I am sorry we do not at present offer any recommendations/reviews on ULIPs. We will be happy to help you with mutual fund products. If you so require funds, kindly mail us using the Help tab to the right of your fundsindia account and click Ask Advisor. Pl. provide your risk appetite and requirements if you need to invest in MFs. Tks Vidya

      1. Can u please tell me what is the maximum amount one can invest in liquid funds or ultra short term funds though funds india platform per day??Is there any limit??

        Thanks

        1. Hi Prasanth, There is no maximum limit for accepting in FundsIndia Platform but pl. ensure your bank supports such a debit at one point as you will be transferring funds online.

  7. Hello Vidya,

    Nice article !!, I was looking for the same.

    1. Do we have to select tenure as well while otping liquid fund?
    2. can we park amount in short term or ultra term short term for more than 3-6 months? or do we have to redemeed and invest again?

    1. Hi Sandeep,

      1. Liquid funds are meant to be liquid. Hence they can be entered and exited any time. There are no tenures and no exit loads.
      2. You can park money in short-term or ultra short-term funds as long as you want. There are exit loads for most funds if you exit before 60-90 days.
      But remember both of these have capital gains tax.
      Also, ultra short-term can be a reserve fund but do no unnecessarily park too much money for too long. it is best to deploy them in good equity/debt funds if you have no use for them in the medium term. Tks

  8. dear vidya,thanks for reply but if I take sip from fund india suggested by you four or five star funds what is the rate of that funds my suggestion is that if you mention the NAV of last day we can purchase or subscribe of fund.Plz.reply me.

    1. Hello Manju,

      NAVs of the funds will be available at all times in your Fundsindia account, when you wish to purchase them. It may not be possible for us to mention it in the article as it will become dated when it is published. Currently, the average 1-year return of liquid funds is 8.99% (before capital gains tax) but they may well become lower as and when interest rates are cut. Tks Vidya

    1. Hello Sagar, Of the funds you mentioned ICICI Pru Flexible Income and tata Floater are ultra-short term funds and not liquid funds. That means slightly higher risks than liquid funds. These 2 funds do not allow SIPs. Quantum Liquid is a liquid fund and has SIP facility. All the 3 funds you mentioned have performed well. Tks, Vidya

  9. Hello Vidya,

    Let me know liquid funds satisfy the below need??

    For a whole year, i need to pay around Rs. 80,000 for all the premiums comprising of term insurance, medical insurance, vehicle insurance. And i need this money in different months of the year.

    And not to overburden for that paying month, i opened different recurring deposits (around 10 RDs) which will mature in the following month so that i can pay the premium. This is working fine with me. But main issue is that, i have to open one RD as and when one RD matures. This is little time consuming and some times, i may miss to open the RD also.

    I have a solution for it but i dont know whether liquid funds supports this need.

    I can invest monthly as a SIP to only instrument (same like an RD but not multple RDs)
    Intest/returns of the same will be reinvested in that instrument
    I can take/redeem money from that instrument as when there is due for paying the premium
    My monthly SIP will continue to that instrument till the policy expiry.

    But i am not sure where can i invest in that way. Let me know whether the liquid funds attracts shortterm capital gains tax.

    Please Suggest which instrument if not liquid funds, i can go for below benifits

    1. Single instrument

    2. Good retunrs.. not expecting more that RD

    3. Partial withdrawl without charges

    Regards,

    Deepak Gudla.

    1. Hello Deepak,

      1. Yes, liquid funds can be used for short-term commitments. A single liquid fund can be used to do an SIP and withdraw money at any time without any exit load.
      2. there can be no guarantee that they will yield RD-plus returns, although they do so now.Liquid funds can certainly give returns more than savings bank rate.
      3. Liquid funds will suffer S.T cap gains if held for less than 1 year. If you choose the dividend reinvestment option then your NAV will be close to cost and thus make cap. gains almost nil. But then, funds would deduct dividend distribution tax (28.3%) from the NAv at the time of declaring the dividend. A person in the 30% tax bracket can use dividend reinvestment; else go for growth option.
      4. If you need help in choice of funds, you may use the ‘Ask Advisor’ tab in the help section of your FundsIndia account. Thanks, Vidya

      1. Hello Vidya,
        I have a question, that since the fund would deduct the ‘Divident Distribution tax’ , then the STCG that I would get from the liquid fund, would I still have to pay the tax. I fall in the 30% tax bracket.

        1. Hello Tasneem, in most cases, since the dividend is stripped from your NAV, your NAV will have hardly appreciated. So there will be little or no gain. But if there is some gain, you will have STCG tax irrespective of DDT. Vidya

  10. Hello Vidya,

    Thanks for the quick response.

    I have another clarification.

    Which of he below method is tax effective

    1. Investing in the liquid fund with Growth option and withdrawing the money as and when required..where only short tern capital gains tax is applicable. As far as i know, in this case, one can avoid DDT

    2. Investing in the liquid fund with Dividend reinvestment and withdrawing money as when required… Where Shortterm capital gains tax is almost nil but DDT of 28% is applicable.

    Please let me know are there any other taxes in the above two cases. and let me know which option is better.

    Regards,
    Deepak Gudla.

      1. Hello Vidya,

        I read the article. Now it is clear to me what kind of fund i can select…

        I also read another article which describes about Liquid plus funds which will attract 14.5% as DDT and also have same liquidity as liquid funds..

        Can you please through some light on the same??

        1. Hi Deepak,

          With effect from June 1 all debt funds (whether liquid or ultra short-term or any other classfn.), will suffer DDT of 28.3%( including cess and surcharge). Hence, there is no diff in dividend taxation. tks, Vidya

          1. Hello Vidya,

            As per my analysis, below is the decision.

            Initiate SIP in Liquid fund with Dividend reinvestment option
            Redemption of the money required as and when i need for paying the premiums

            With this.. i can avoid DDT of 28.3% and i need to pay only the SCGT, but as the unit values are not much different than investment, this will be minimal..

            Please correct me if i am wrong.

            Regards,
            Deepak Gudla.

          2. Hello Deepak,

            the point you have missed here is DDT is deducted from NAV for both dividend payout and dividend reinvestment.
            End of day, there is no escaping taxes, especially for less than 1 year in debt funds. You can only reduce your burden. If you are in the 30% tax bracket, then for less than one year period, by using dividend reinvestment, you will save a few percentage points of tax.
            Thanks
            Vidya

  11. Also to inform you that, i am falling under the tax bracket of 30%..
    Which of the taxes are considered for income tax slab..?? DDT or STCG or LTCG???

    Please give me the best option based on these details…

    Thanking you in advance.

  12. Hello Vidya,

    I am looking through fundsindia.com -> Scheme Explorer. but i am unable to get any one good liquid fund with SIP option.

    Please help me in this regard…

    I am looking one with Dividend Reinvestment option And SIP.

    Regards,
    Deepak Gudla.

    1. HellO Depak,

      We once again request investors to kindly use the ‘Ask Advisor’ Feature in their FundsIndia account to get portfolio/fund queries answered or for any advisory services. Click the help tab to go to ‘Ask Advisor’. That would give us a better tracking system than a blog. Thanks, Vidya

  13. hello Vidya,

    I am looking to save 40K per month and invest the same for next 6 or 8 months. Which plan is best for investment 6 months or 8 months duration? The goal is to book a house property?

    Regards,
    Bikash

    1. Vidya is on vacation for the next few days, and I’ll answer questions selectively during this period.

      To answer your question, a period of 6-8 months is not sufficient for risks at any measure. Honestly, you’ll be better off with short term deposit products from your bank for this interval. The risk is not worth it for such a short time period.

      thanks,

      Srikanth

  14. Vidya,
    I am fairly new to FundsIndia and as well as MF investing. I have made contingency fund and so far the fund was parked in a Nationalized Bank Savings Account earning an interest of 4-5%. Now, having read about Liquid Funds, would like to know whether it is better to park the amount have reserved for contingency into a Liquid Fund than in a SB account. The need of the fund could be short-term (within 1 year) or even long term (upto 5 years). Also what would be the implications of withdrawing a partial amount from a liquid fund. Need to know about CG implications on this, since I fall in the higher tax bracket.

    Thanks in advance for your valuable inputs

    Venkat

    1. Hi venkat,

      yes, it is certainly a superior returning option to park contingency funds in liquid schemes. You can take out the money any time as there is no exit load in liquid funds.
      Request you to read https://blog.fundsindia.com/blog/mutual-funds/make-use-of-indexation-benefit-for-debt-funds/1971 and also, https://blog.fundsindia.com/blog/advisory/should-you-choose-the-dividend-option-or-the-growth-option/1757 to know the capital gains implication and whether you should choose growth or dividend option in liquid funds. Do use the ‘Ask advisor’ feature available when you click the help tab in your account, for any help with respect to investing. Our advisors will mail or call back as required by you. thanks.

  15. I’m Krishna 22 yrs. old from Dombivli (Mumbai)

    I want to invest in MF (online platform).

    Please suggest me some 2-3 funds.

    I want to invest through SIP. Rs.1500.00/- p.m.

    My reason to invest in MF for “WEALTH CREATION”

    My horizon to invest in MF is 5 to 6 years

    1. hello Krishna, Fund advisory is available free of cost to all our active account holders. request you to complete your registration with us by simply downlaoding and signing the onetime paper work and then you can use the ‘Ask Advisor’ feature in the help tab in your activated account to ask any portfolio related advice or review of funds through mail or through call back. I can meanwhile ask our support team to contact you to complete the formality. thanks, Vidya

  16. Hi Vidya,

    I would like to park Rs. 2 to 3 lacs in a Liquid Fund. For the next 6 months I may not require this 2 or 3 lacs. Can you help me with your suggestion, do you advise me to invest & re-invest this amount every month for 6 times or should I opt for 6 months tenure in a single shot.

    Regards,
    Padmanabhan

    1. Hello Padmanabhan, Since you don;t need the money for next 6 months, you can split the money between a liquid fund and an ultra short-term fund and invest in oen shot. There is no point going for SIP in liquid funds, if you have the lumpsum in hand. I am constrained from providing you specific fund recommendations. If you have your FundsIndia account activated, you can use the free ‘Ask Advisor’ feature to enable us to help you formally. thanks, Vidya

  17. Hi Vidya,

    I dont have an account with FundsIndia. I will open it and try seeking help from Ask Advisor. Thanks for your guidance.

    Regards,
    Padmanabhan

  18. Hello Vidya,

    As we have read that Liquid funds are a good parking option compared to Savings Bank account,
    a) What would be the minimum balance of ones Savings account above which he would benefit from the Liquid fund since we are aware about the 10k interest exemption?
    b) Are we assuming that the return from the fund in hand of the investor is round about 8% and on that no tax is applicable? or we deduct 22.07% from the 8% we are projecting as return from the fund.

    Thank you
    Regards
    Mital

    1. Hello Mital,

      1. You need to look at the post tax returns of liquid fund to see if it makes more sense than savings bank, whether or not you are within the Rs 10,000 per year savings interest exemption. For instance, a post-tax return for a liquid fund that delivered 8% would be 5.6% if you are in the 30% tax bracket and held it for less than 3 years. It is still higher than the 4% returns on savings, even though the latter is not taxed upto 10,000.
      2. No, we are not making any assumptions on returns or that it is not taxed. As mentioned in point one, as long as post tax returns is more than 4%, you should consider parking surplus other than what you need immediately in liquid funds.
      thanks
      Vidya

  19. My daugter is having Rs. 5 lac in FDRs for period of 390 days and Onte Lac in saving A/C .She is getting net salary as ad hoc lecturer Rs. 55000. She will be requiring amount lying today in bank in First Quarter of 2017 for her marriage. Please suggest fund which is safe with return better than Bank FDR with no tax imposition

  20. Can u suggest some schemes / mutual funds to park lumpsum for a period of 12 – 18 months..I am already a subscriber of fundsindis. Can I invest through the same login ??

    1. H Kalyani, Birla Sun Life Floating Rate LTP, Templeton India Low Duration (this fund has an exit load if redeemed within 3 months), or Templeton India Short Term Income (exit load if redeemed within 270 days) and JP Morgan India Short Term Income (exit load if redeemed within 6 months) are good options to earn returns slightly higher than liquid funds. You may choose these funds if you can hold for at least 12 months as most of them suffer exit load barring Birla Sun Life Floating Rate Plan LTP.
      Yes you can very much invest online through FundsIndia if you are a activated user (first time application signing is done)- Vidya

  21. Dear Madam,

    You please be suggest, I am having a ULIP in ICICI PRU LIFE “FUND NAME SFIN* R.I.C.H. FUND II ULIF 049 17/03/08 LRICH2 105” since nov 2008, now its NAV 14/-. I want to switch another good scrip in ICICI PRU LIFE.

    Please suggest good returns scrip madam.

    1. Hello Satya, I am sorry we do not at present offer any recommendations/reviews on ULIPs. We will be happy to help you with mutual fund products. If you so require funds, kindly mail us using the Help tab to the right of your fundsindia account and click Ask Advisor. Pl. provide your risk appetite and requirements if you need to invest in MFs. Tks Vidya

      1. Can u please tell me what is the maximum amount one can invest in liquid funds or ultra short term funds though funds india platform per day??Is there any limit??

        Thanks

        1. Hi Prasanth, There is no maximum limit for accepting in FundsIndia Platform but pl. ensure your bank supports such a debit at one point as you will be transferring funds online.

  22. I understand only that if cash is ideal in SB account than only liquid fund is good. but comparing FD’s its return almost same or less.

    still asking if i am getting 9% in Bank FD , Which liquid fund is good to invest for near by return?

    1. Hi Vihar, it is true that liquid fund returns are currently almost as high as fixed deposits. But do not go by these returns. When interest rates fall liquid fund returns will also fall a bit but remain higher than savings account rate. In such a case, it is still possible that FD rates will be superior. Do not use liquid funds for investment. Use them for parking money temporarily. If you want funds comparable to FD, you should go for income funds. – Vidya

      1. dear mam
        i have query regarding liquid fund and income fund.?
        which one is better?
        for a lump sum investment in liquid fund of any fund catagory i can take any sip from the other fund or i have to select same fund sip for stp?
        what is best liquid fund and sip for 2 to 5 yrars?

        1. Sorry for the delayed response. Which fund is better depends on your time frame and requirement. If you are going to do STP, then invest in liquid funds and move them to the funds chosen. the ‘from’ fund and ‘to’ fund have to be from the same fund house. thanks, Vidya

  23. Hello Vidya,

    Nice article !!, I was looking for the same.

    1. Do we have to select tenure as well while otping liquid fund?
    2. can we park amount in short term or ultra term short term for more than 3-6 months? or do we have to redemeed and invest again?

    1. Hi Sandeep,

      1. Liquid funds are meant to be liquid. Hence they can be entered and exited any time. There are no tenures and no exit loads.
      2. You can park money in short-term or ultra short-term funds as long as you want. There are exit loads for most funds if you exit before 60-90 days.
      But remember both of these have capital gains tax.
      Also, ultra short-term can be a reserve fund but do no unnecessarily park too much money for too long. it is best to deploy them in good equity/debt funds if you have no use for them in the medium term. Tks

  24. are LF better than the Flexi deposits offered by various banks where the idle money sweeps in to and out of the FD’s automatically created by the bank over and above a threshold limit specified initially by the account holder?

    1. Hello Mr Mohan, you have taken a good example. Yes, flexi deposits allow sweep in and sweep out of money when they touch a set threshold. Hence, the liquidity is better compared with regular fixed deposits. But when it comes to earning returns, it would entirely depend on whether your fixed deposit money remains intact or keeps coming back to your savings account. If it remains intact, it is likely that the returns will be superior to liquid returns pre-tax. If it is only temporarily parked, much would depend on the duration of the deposit. Hence, the return scenario will keep varying. Also liquid funds, as we stated in the article are more tax efficient than the tax on deposit/saving account interest income.
      But if you do have a flexi deposit, where your deposit remains intact and does not get transferred to savings account again (during deposit tenure), you should not be comparing such a fixed deposit with liquid funds. They should be compared with income funds. Look out for our posting soon on a comparison between income funds and fixed deposits.- Vidya

  25. This seems to be a nice option for me. Is it possible to invest on these funds from my existing FundsIndia account? And also where i can check all the available options in this category?

    1. Hi prasanna, you can invest in liquid funds through fundsindia. Login to your account and click Mutual funds) in the black panel at the top. Choose new investment and go ahead and choose liquid funds and then the fund of your choice. You can also refer http://www.fundsindia.com/top funds to look at our top picks across various fund categories. Liquid and ultra short-term funds will be available in the less than one year holding. In case of ultra short-term funds, check scheme details as some of them will have exit load. – Vidya

  26. Hi Vidya,

    Hope you are doing good. I was planning to invest in liquid funds just when I received your post.

    You just mentioned abut some liquid funds which someone can consider. I just checked there performance on moneycontrol site and found out that for eg “Peerless Fund” is the one which still hasent been rated. What should be the thought process while deciding upon the best liquid funds.. My thought process was to look at the top ranking liquid funds (for eg ICICI Pru Liquid plan and go with it. Your suggestions/considerations have put me in a bit of dilemna. So would you be so kind to just give some pointers how to decide b/w funds.

    1. Hi Rohit, Thanks for your query. We choose funds based on all or some of the following aspects: returns, maturity period (of underlying instruments), asset size of fund and whether SIP is available on the fund. In this aspect, Peerless Liquid had a very low tenure, making it a very safe bet. It is because of this low tenure that its returns are also lower. Some funds we suggested had a slightly higher tenure and therefore higher returns. For instance, Birla Sun Life Floating Rate Short Term is an example. While tenure may not seem important to you as you have liquidity, it is important from an angle of safety. So we have provided a basket of such funds. You may choose the other funds for slightly higher returns.
      Also, with liquid funds, the rating you see may be extremely dynamic as ratings will vary even based on short-term returns. You may choose them based on your need. If your need is simply to park money for a while, chose the top ones. Or if you are using a liquid fund to make investments (STP) in to other funds in the fund house, take the one that is available in the fund house and has a reasonable record. – Tks, Vidya

  27. Hello Vidya,

    Thanks for the quick response.

    I have another clarification.

    Which of he below method is tax effective

    1. Investing in the liquid fund with Growth option and withdrawing the money as and when required..where only short tern capital gains tax is applicable. As far as i know, in this case, one can avoid DDT

    2. Investing in the liquid fund with Dividend reinvestment and withdrawing money as when required… Where Shortterm capital gains tax is almost nil but DDT of 28% is applicable.

    Please let me know are there any other taxes in the above two cases. and let me know which option is better.

    Regards,
    Deepak Gudla.

      1. Hello Vidya,

        I read the article. Now it is clear to me what kind of fund i can select…

        I also read another article which describes about Liquid plus funds which will attract 14.5% as DDT and also have same liquidity as liquid funds..

        Can you please through some light on the same??

        1. Hi Deepak,

          With effect from June 1 all debt funds (whether liquid or ultra short-term or any other classfn.), will suffer DDT of 28.3%( including cess and surcharge). Hence, there is no diff in dividend taxation. tks, Vidya

          1. Hello Vidya,

            As per my analysis, below is the decision.

            Initiate SIP in Liquid fund with Dividend reinvestment option
            Redemption of the money required as and when i need for paying the premiums

            With this.. i can avoid DDT of 28.3% and i need to pay only the SCGT, but as the unit values are not much different than investment, this will be minimal..

            Please correct me if i am wrong.

            Regards,
            Deepak Gudla.

          2. Hello Deepak,

            the point you have missed here is DDT is deducted from NAV for both dividend payout and dividend reinvestment.
            End of day, there is no escaping taxes, especially for less than 1 year in debt funds. You can only reduce your burden. If you are in the 30% tax bracket, then for less than one year period, by using dividend reinvestment, you will save a few percentage points of tax.
            Thanks
            Vidya

  28. Also to inform you that, i am falling under the tax bracket of 30%..
    Which of the taxes are considered for income tax slab..?? DDT or STCG or LTCG???

    Please give me the best option based on these details…

    Thanking you in advance.

    1. Hello Sagar, Of the funds you mentioned ICICI Pru Flexible Income and tata Floater are ultra-short term funds and not liquid funds. That means slightly higher risks than liquid funds. These 2 funds do not allow SIPs. Quantum Liquid is a liquid fund and has SIP facility. All the 3 funds you mentioned have performed well. Tks, Vidya

  29. dear vidya,thanks for reply but if I take sip from fund india suggested by you four or five star funds what is the rate of that funds my suggestion is that if you mention the NAV of last day we can purchase or subscribe of fund.Plz.reply me.

    1. Hello Manju,

      NAVs of the funds will be available at all times in your Fundsindia account, when you wish to purchase them. It may not be possible for us to mention it in the article as it will become dated when it is published. Currently, the average 1-year return of liquid funds is 8.99% (before capital gains tax) but they may well become lower as and when interest rates are cut. Tks Vidya

  30. hello Vidya,

    I am looking to save 40K per month and invest the same for next 6 or 8 months. Which plan is best for investment 6 months or 8 months duration? The goal is to book a house property?

    Regards,
    Bikash

    1. Vidya is on vacation for the next few days, and I’ll answer questions selectively during this period.

      To answer your question, a period of 6-8 months is not sufficient for risks at any measure. Honestly, you’ll be better off with short term deposit products from your bank for this interval. The risk is not worth it for such a short time period.

      thanks,

      Srikanth

  31. Hello Vidya,

    I am looking through fundsindia.com -> Scheme Explorer. but i am unable to get any one good liquid fund with SIP option.

    Please help me in this regard…

    I am looking one with Dividend Reinvestment option And SIP.

    Regards,
    Deepak Gudla.

    1. HellO Depak,

      We once again request investors to kindly use the ‘Ask Advisor’ Feature in their FundsIndia account to get portfolio/fund queries answered or for any advisory services. Click the help tab to go to ‘Ask Advisor’. That would give us a better tracking system than a blog. Thanks, Vidya

  32. Vidya,
    I am fairly new to FundsIndia and as well as MF investing. I have made contingency fund and so far the fund was parked in a Nationalized Bank Savings Account earning an interest of 4-5%. Now, having read about Liquid Funds, would like to know whether it is better to park the amount have reserved for contingency into a Liquid Fund than in a SB account. The need of the fund could be short-term (within 1 year) or even long term (upto 5 years). Also what would be the implications of withdrawing a partial amount from a liquid fund. Need to know about CG implications on this, since I fall in the higher tax bracket.

    Thanks in advance for your valuable inputs

    Venkat

    1. Hi venkat,

      yes, it is certainly a superior returning option to park contingency funds in liquid schemes. You can take out the money any time as there is no exit load in liquid funds.
      Request you to read https://blog.fundsindia.com/blog/mutual-funds/make-use-of-indexation-benefit-for-debt-funds/1971 and also, https://blog.fundsindia.com/blog/advisory/should-you-choose-the-dividend-option-or-the-growth-option/1757 to know the capital gains implication and whether you should choose growth or dividend option in liquid funds. Do use the ‘Ask advisor’ feature available when you click the help tab in your account, for any help with respect to investing. Our advisors will mail or call back as required by you. thanks.

  33. Hello Vidya,

    Let me know liquid funds satisfy the below need??

    For a whole year, i need to pay around Rs. 80,000 for all the premiums comprising of term insurance, medical insurance, vehicle insurance. And i need this money in different months of the year.

    And not to overburden for that paying month, i opened different recurring deposits (around 10 RDs) which will mature in the following month so that i can pay the premium. This is working fine with me. But main issue is that, i have to open one RD as and when one RD matures. This is little time consuming and some times, i may miss to open the RD also.

    I have a solution for it but i dont know whether liquid funds supports this need.

    I can invest monthly as a SIP to only instrument (same like an RD but not multple RDs)
    Intest/returns of the same will be reinvested in that instrument
    I can take/redeem money from that instrument as when there is due for paying the premium
    My monthly SIP will continue to that instrument till the policy expiry.

    But i am not sure where can i invest in that way. Let me know whether the liquid funds attracts shortterm capital gains tax.

    Please Suggest which instrument if not liquid funds, i can go for below benifits

    1. Single instrument

    2. Good retunrs.. not expecting more that RD

    3. Partial withdrawl without charges

    Regards,

    Deepak Gudla.

    1. Hello Deepak,

      1. Yes, liquid funds can be used for short-term commitments. A single liquid fund can be used to do an SIP and withdraw money at any time without any exit load.
      2. there can be no guarantee that they will yield RD-plus returns, although they do so now.Liquid funds can certainly give returns more than savings bank rate.
      3. Liquid funds will suffer S.T cap gains if held for less than 1 year. If you choose the dividend reinvestment option then your NAV will be close to cost and thus make cap. gains almost nil. But then, funds would deduct dividend distribution tax (28.3%) from the NAv at the time of declaring the dividend. A person in the 30% tax bracket can use dividend reinvestment; else go for growth option.
      4. If you need help in choice of funds, you may use the ‘Ask Advisor’ tab in the help section of your FundsIndia account. Thanks, Vidya

      1. Hello Vidya,
        I have a question, that since the fund would deduct the ‘Divident Distribution tax’ , then the STCG that I would get from the liquid fund, would I still have to pay the tax. I fall in the 30% tax bracket.

        1. Hello Tasneem, in most cases, since the dividend is stripped from your NAV, your NAV will have hardly appreciated. So there will be little or no gain. But if there is some gain, you will have STCG tax irrespective of DDT. Vidya

  34. Hi Vidya,

    I would like to park Rs. 2 to 3 lacs in a Liquid Fund. For the next 6 months I may not require this 2 or 3 lacs. Can you help me with your suggestion, do you advise me to invest & re-invest this amount every month for 6 times or should I opt for 6 months tenure in a single shot.

    Regards,
    Padmanabhan

    1. Hello Padmanabhan, Since you don;t need the money for next 6 months, you can split the money between a liquid fund and an ultra short-term fund and invest in oen shot. There is no point going for SIP in liquid funds, if you have the lumpsum in hand. I am constrained from providing you specific fund recommendations. If you have your FundsIndia account activated, you can use the free ‘Ask Advisor’ feature to enable us to help you formally. thanks, Vidya

  35. I’m Krishna 22 yrs. old from Dombivli (Mumbai)

    I want to invest in MF (online platform).

    Please suggest me some 2-3 funds.

    I want to invest through SIP. Rs.1500.00/- p.m.

    My reason to invest in MF for “WEALTH CREATION”

    My horizon to invest in MF is 5 to 6 years

    1. hello Krishna, Fund advisory is available free of cost to all our active account holders. request you to complete your registration with us by simply downlaoding and signing the onetime paper work and then you can use the ‘Ask Advisor’ feature in the help tab in your activated account to ask any portfolio related advice or review of funds through mail or through call back. I can meanwhile ask our support team to contact you to complete the formality. thanks, Vidya

  36. Hi Vidya,

    I dont have an account with FundsIndia. I will open it and try seeking help from Ask Advisor. Thanks for your guidance.

    Regards,
    Padmanabhan

  37. Hello Vidya,

    As we have read that Liquid funds are a good parking option compared to Savings Bank account,
    a) What would be the minimum balance of ones Savings account above which he would benefit from the Liquid fund since we are aware about the 10k interest exemption?
    b) Are we assuming that the return from the fund in hand of the investor is round about 8% and on that no tax is applicable? or we deduct 22.07% from the 8% we are projecting as return from the fund.

    Thank you
    Regards
    Mital

    1. Hello Mital,

      1. You need to look at the post tax returns of liquid fund to see if it makes more sense than savings bank, whether or not you are within the Rs 10,000 per year savings interest exemption. For instance, a post-tax return for a liquid fund that delivered 8% would be 5.6% if you are in the 30% tax bracket and held it for less than 3 years. It is still higher than the 4% returns on savings, even though the latter is not taxed upto 10,000.
      2. No, we are not making any assumptions on returns or that it is not taxed. As mentioned in point one, as long as post tax returns is more than 4%, you should consider parking surplus other than what you need immediately in liquid funds.
      thanks
      Vidya

  38. My daugter is having Rs. 5 lac in FDRs for period of 390 days and Onte Lac in saving A/C .She is getting net salary as ad hoc lecturer Rs. 55000. She will be requiring amount lying today in bank in First Quarter of 2017 for her marriage. Please suggest fund which is safe with return better than Bank FDR with no tax imposition

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