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Are current liquid fund returns worth your while?

At the moment liquid funds are delivering an annualised return of 5.5%-6%. This is lower than the 6.5%-7% seen a year ago. However, it is in line with the downward trending interest rates in the economy. If you are feeling disappointed with these returns and think that its better to move to a higher return fund or leave money in the bank itself, first read through the points below and then decide what to do.
Liquid funds are mutual fund schemes which invest in very short maturity debt and money market securities. These funds are open-ended and allow investors to invest and redeem as required. Given that the funds invest short term securities, the returns from these schemes reflect the current trend in interest rates.

At the moment liquid funds are delivering an annualised return of 5.5%-6%. This is lower than the 6.5%-7% seen a year ago. However, it is in line with the downward trending interest rates in the economy.

If you are feeling disappointed with these returns and think that it’s better to move to a higher return fund or leave money in the bank itself, first read through the points below and then decide what to do.

Lower deposit rates

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Bank deposit rates too are lower in the current environment. For example, SBI is offering a 4.8% annual interest on a 6-month fixed deposit and around 5.5% interest on a one-year deposit. Similarly, HDFC Bank is offering 5.25% and 5.8% respectively. SBI has lowered its saving bank interest to 2.75% per annum.

Liquid fund returns on a broad basis continue to be better than bank deposit rates with no added pressure of being a bank customer. You can park funds for a couple of days or a couple of months and earn competitive yield in the meantime.

Flexibility

You can buy and redeem funds online and, in some cases, there is an instant redemption facility of up to Rs 2 lakh where the funds can be withdrawn and money received in the bank within the hour.

Liquid fund returns on a broad basis continue to be better than bank deposit rates with no added pressure of being a bank customer. You can park funds for a couple of days or a couple of months and earn competitive yield in the meantime.

Tax advantage

While there is no benefit in the short term as compared to other options, if you don’t utilise the money and leave it in this option for a long period, after three years, the tax benefits outweigh other short-term investment options.

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Higher returns come with more risk

There are funds which can give you higher returns, Ultra short term debt funds and Short term income funds are giving annualised returns of 7%-9% currently which can be tempting. However, these are not strictly funds meant to part money for a few days to a few months. In these funds, you need to be sure that you have the staying power of 6 months and more.

Some short-term income funds are delivering negative returns too as risk is high in some portfolios.

Given the short-term nature of securities they hold, liquid funds are a good option to park money you may need at any time. In this case you needn’t chase returns, rather look for optimising returns along with stability. It is in this combination that liquid funds work better than bank deposits

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