Closer to March, your budget may have to accommodate a few one-off expenses. If you have not already thought of those, here are a few:
One, you would be required to pay your self-assessment tax a few months after the close of this financial year; with July, likely to be the final cut-off date.
Two, if you are changing schools for your kid or are required to pay a massive upfront fee at the beginning of the next academic year, then this may be the time to set aside a sum for it.
Three, post the final term at school, its vacation time for kids. If you have not thought about the place, never mind; you can at least set up a fund for this over the next couple of months.
Liquid funds come in handy for these requirements (and much more) as they will ensure that money is made available to you when you require it, while still earning better returns as compared with your savings bank account. If you are a robust spender and let such money lie in your savings account, chances are that you may swipe your way into the money ‘mentally’ set aside for specific needs.
How you can build
Agreed, it is not easy to set aside a big sum at one stride in March, that too when some of you may still be investing towards your last minute Section 80C tax benefit requirements. But here are some ways to go about doing this: First, check if you are continuously running high surpluses in your savings account post all your operating monthly expenses. If so, shift a third or more of such surplus to a liquid fund. For this purpose, add up the balances in your multiple saving bank accounts.
If not, try to do a monthly investment using an SIP or simply invest lump sums as and when you can spare and invest them into a liquid fund.
Secondly, check if you have any investments in deposits or other modes coming up for maturity in the near term. If they do and you have not set aside such money for any other goal, then transfer the required money alone into liquid funds and invest the rest in options that suit you. Do not simply let this maturity amount lie in your savings account.
Thirdly, there is an option that you should use sparingly and only if you are unable to accommodate the first two. If you are sure you will be in real need of money over the next few months, then do a quick portfolio check of your mutual funds. If you have a portfolio/fund that is not particularly allocated towards achieving any goal, see if you can sell some of the laggards in the portfolio. Ideally, we would recommend a switch on such funds but for any pressing need for the money.
You can also book profits in such a portfolio/fund without having to suffer capital gains tax (investments over one year in will not suffer capital gains tax) nor exit load. When we say profits, you must have had an absolute return of at least 20-25 per cent on the fund or portfolio to sweep such profits.
If there is an SIP running, remove only that many units (if possible) which have been in the portfolio for over a year to ensure you do not suffer short-term capital gains. Please note that we would ideally not like to disturb any portfolio that is delivering well but for urgent requirements. Ensure that you still retain the fund and only sell some units. Transfer this money into any liquid fund in the same fund house.
What to choose
If you need to save money in a liquid fund through SIP, then go for those schemes that have an SIP option. Not all funds have. Just to provide a sample list of some of the good funds that have an SIP: Pramerica Liquid, IDBI Liquid, HDFC Cash Management Savings Liquid and JP Morgan India Liquid.
There are others such as DSP BR Liquidity or Birla Sun Life Floating Rate Short Term that do not have SIP facility. This is not an exhaustive list. We took the list based on risk-adjusted returns superior to treasury bill rates at this point. Also check for the minimum amount allowed as investment – it could be Rs 5,000 or Rs 10,000.
If you are booking profits in some of the equity funds and shifting to liquid funds, you might as well use liquid funds within the fund house. Remember that there is no huge variance in performance of most liquid funds. Hence, it may be easier to shift within the fund house.
What if you never went on a vacation or actually calculated a refund from the income tax department? No harm done. Instead of letting the money lie in the liquid fund, quickly initiate a STP (or switch, depending on the quantum of money) to move the money to an equity/balanced/debt fund of your choice or which suits your risk profile.
Remember, a contingency fund for emergencies should be continuously parked in liquid funds. But specific funds built with goals in mind, if not used, should not be lying around, as liquid funds are not investments; they are merely alternative savings vehicles.
If you are in the 10-20 per cent tax bracket then you may well prefer the growth option as dividend distribution taxes are higher than that. Otherwise, you may marginally benefit from a dividend reinvestment option.
Liquid funds are not tax free. They may at best be tax efficient. You will have to pay capital gains tax.
Now, that is not a disadvantage as savings account interest is taxed. (we thank a few alert readers who pointed out that savings bank interest is not taxed upto Rs 10,000). So read our earlier blog on liquid funds to know how they work and the tax treatment: https://www.fundsindia.com/blog/index.php/mutual-funds/liquid-funds-invest/751/
The above uses are just illustrative examples. You can use liquid funds to save up for your insurance premium, to meet your credit card repayment cycle, to pay your professional statutory payments such as service tax or advance tax. If you are a professional or are self-employed, you can use them for loan repayments and so on. It is up to you to extend the list.
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