Around 95% of cash has now been deposited in banks due to demonetization. Now a bank incurs a cost due to a deposit being made in terms of the interest paid on these. And hence they prefer to not encourage any more deposits.
In such a situation one can consider going for alternative options with some risk instead of the traditional secure investment in fixed deposits.
Moreover, liquid funds certainly are an option with a lesser amount of risk involved.
Liquid funds also remain preferable as an investment for the short term. For e.g. consider that you have INR 5 Lakh that you want to use for making a certain purchase after some 3 months. In this case, it would be better to invest in liquid funds instead of going for an FD, as liquid funds shall give you slightly better returns.
Here are some of the things you need to know:
Overview
Liquid funds or money market funds usually have returns that are fairly more than that from an FD. They come in the category of debt funds and have a maturity period of maximum 91 days.
India has numerous fund houses that offer different types of liquid funds with no entry/exit load. The investment can be made through SIPs or in the form of lump sum payments.
Tax Implications
Currently, fixed deposits offer a return of 4-7%. But post taxation, the returns are less in comparison to liquid funds.
For example, consider that a person falls in the 30% tax slab and has an annual return of 6.5% on his FD. But after the taxes are levied, he/she is left with only 4.55%.
However, while the tax is incurred yearly on FDs, it needs to be paid on mutual funds only when they are liquidated. Furthermore, liquid funds have short and long term capital gain tax applicable.
For investments that are redeemed in less than 3 years, the short–term capital gains tax is applicable. In this case, the gain along with the person’s income becomes taxable as per their tax bracket.
In the case of periods that exceed 3 years, an individual will have to pay a tax of 20% on the gain further to indexation. With indexation, it becomes possible to know the price at which an investment was brought taking inflation into consideration.
Liquid funds thus come with many benefits that are worth considering before investing in a fixed deposit