Liquid mutual funds: should I invest the money in my savings account in liquid mutual funds? will taxes eat away at my income?

I keep my savings in the bank account. I believe that liquid funds give better returns. However, fund gains are also subject to short-term capital gains tax. Won’t the tax eat away at my income?


Rushabh Desai, mutual fund distributor registered with AMFI responds: In some situations, liquid funds have an advantage over savings accounts because they are actively managed by an expert fund manager. The returns will depend on the bank you have your account in and the liquid fund you intend to venture into. Some banks may offer higher returns on their savings accounts compared to some liquid funds and vice versa.

Subject to market risks / changes, the net returns of the liquid funds category are currently in the range of 2.9-4.1% and the returns on the savings accounts of the three largest banks are around around 2.7 to 3.5%. Short-term income (36 months or less) generated by liquid funds will be taxed according to your tax base. Liquid funds invest in instruments with maturities of up to 91 days. Thus, depending on the fund, the ideal holding horizon in this category should be between 1 and 3 months. For your immediate savings, a savings account from a reputable bank may be a better bet. You can claim a deduction on interest earned up to Rs 10,000 under section 80TTA. If you have a longer time horizon, you can invest part of your savings in liquid funds for diversification and not get carried away by high returns.

I am 31 years old and I am winning. Some of my FD are maturing and I will soon have Rs 15 lakh to invest. Where can I park this money as a lump sum for 15-20 years to get an 8-9% CAGR?

Naveen Kukreja, CEO and Co-Founder of Paisabazaar.com, responds: The current interest rate regime would make it difficult to generate 8-9% annualized returns from fixed income instruments like DFs, debt funds or small savings plans, at least in the short term. In addition, for time horizons of 15 to 20 years, the returns of equities as an asset class greatly outperform the fixed income asset class.

Therefore, I will suggest that you distribute your FD proceeds equally in the direct plans of these equity funds – Tata Index Sensex Fund or HDFC Index Sensex Fund; and Parag Parikh Flexi Cap Fund or Mirae Asset Emerging Bluechip Fund. Avoid investing lump sums in equity funds due to tight market valuations. Instead, invest the FD maturity product through one-year SIP. This will reduce the risk posed by stretched valuations and can help average your cost of investing during market corrections. Try to route SIP contributions through banks that offer interest rates on savings accounts of 5-6.5% for deposit ranges of 1-10 lakh. This will earn you higher interest income on the FD product parked for SIP contributions.