Bank time deposits have been the most popular place in India for decades to invest in short-term funds, but liquidity is now becoming one of the highest alternatives.
In order to make effective investment decisions, it is important to understand the ways in which liquidity is more beneficial to investors than bank deposits. Even if the FDS guarantees certainty of returns, liquidity can still provide higher liquidity and in some cases tax efficiency can also be provided. Please continue to learn more:
Understand the basics of working capital
First, let us know what liquidity is. They are a common fund that mainly invests in very short-term debt securities such as: Treasury bills, commercial paper and deposit certificates. Since they invest in short-term securities, this makes them very stable, efficient and liquid.
Key advantages of liquidity over bank deposits
- Possibility of greater returns: Bank deposits receive certain interest at a certain interest rate, while liquid funds enjoy a higher possibility of return. Liquid Funds invests in very short-term debt instruments such as treasury bills, business documents and deposit certificates. Although returns are not guaranteed and market-dependent, guarantees of higher returns allow Liquids’ funds to fund investors’ value investment.
- Higher liquidity and availability: Liquid funds are highly liquid by nature and can withdraw funds at any time. In addition, these funds are credited to a bank account within 24 hours. On the other hand, bank deposits have a lock-in period, and early withdrawal will attract overall returns or related expenses to be reduced. Liquid funds therefore have important advantages over bank deposits due to their ease of use flexibility.
- Tax efficiency: Liquid funds are an effective option for income tax for bank deposits, especially for high-tax investors. Liquid capital income is taxed on the investor’s tablet, but it is only for profit. Interest earned on the bank FDS is taxed on the investor’s income tax tablet in the entire amount, depriving the investor of the tax returns with high taxes. Furthermore, if the money is left in liquidity for more than three years, the tax rate is reduced by 20% at the index benefit tax rate.
- Liquidity can also act as emergency funds: Because of their liquidity and fixed returns (although not guaranteed), liquidity is an ideal destination for stopping your emergency situation, so they can also act as emergency funds. Without any urgent financial need, investors can withdraw funds within a short period of time without incurring fines. Liquid funds can be used to invest in your business as they are easily available when needed.
- Lower outlet load: Unlike some other investment options, liquidity charges not much or any exit load (redemption fee). That is, your money is back to you with little processing fees, which can be relaxed compared to some sort of fixed deposit, and you are charged a previously withdrawn fee.
Some of the leading liquid funds are: Mahindra Manulife Liquid Fund, Aditya Birla Sun Life Life Fund, Quant Liquid Fund, etc. Over the past 3 years, these funds have had returns between 5 and 7%. Therefore, these funds provide competitive returns that can be considered an investment option after proper consultation with a financial advisor.
Thus, liquidity has some advantages over bank deposits, such as higher potential returns, ease of access, tax efficiency in some cases, backup currency suitability and low exit fees. Understanding these benefits will enable investors to make informed decisions about placing short-term funds and achieving the best returns.
Disclaimer: Mutual fund investment is subject to market risks; please carefully read all plans-related documents before investing.
