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Are current liquid fund returns worth your while?

Liquid funds are mutual fund schemes which invest in very short maturity debt and money market securities. Such funds are open-ended and encourage investors to spend and redeem as necessary. Given that the funds hold short term debt, the returns from these strategies reflect the recent rise in interest rates.

At the moment liquid funds are offering an annualised return of 5.5 percent -6 percent. It is better than the 6.5 percent -7 percent recorded a year earlier. Nevertheless, it is in keeping with the downward trending interest rates in the economy.

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

Higher deposit rates

Bank deposit levels too are lower in the current setting. For eg, SBI is offering a 4.8 percent annual interest on a 6-month fixed deposit and about 5.5 percent interest on a one-year deposit. Similarly, HDFC Bank is giving 5.25 percent and 5.8 percent respectively. SBI has reduced the saving bank interest to 2.75 percent 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 there is an immediate redemption facility of up to Rs 2 lakh in some situations where funds can be deducted and money deposited 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.

Economic gain

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.

Small returns are more costly

There are funds that can give you better returns, Super short-term debt funds and Short-term income funds are currently offering 7%-9% annualized returns that can be enticing. Nevertheless, these are not solely funds intended to split money for a few days or a few months. In these assets, you need to make confident that you have the staying power of 6 months and more.

Many short-term income funds are producing 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 seek returns, but look for optimising returns along with stability. It is in this mix that liquid funds perform best than bank deposits

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