There is a news item in Economic Times on 9th Jan 2014 on page 10 "Liquid Funds Get Tech Edge to Lure Retail Investors now" and in that there is a Data shared by ET which says that the Liquid and money market funds corpus has gone up from Rs.1.29 lakh crores in Jul 2013 to Rs.2.46 lakh crores by Nov 2013. What is the reason?
There are many and I would like to share some of them :
1. These funds offer very good return in short term i.e. less than six months as compared to FD, the most popular fixed return option. For a period of 1 day to 180 days the rate of return is around the same i.e. 8.5% p.a. as of now whereas the FDs for this period offer only 6 to 7% p.a. maximum.
The taxation impact is same for both for this period.
That means it is good for those who want to park their money for short term period.
2. For medium term period i.e. more than 6 months upto 1 year, the rates are broadly the same for both FD and these funds and there is no difference in tax rate either.
Therefore, it is rate and tax neutral for these investors.
3. If the investment horizon is more than 1 year, the rates could be higher if the chose mode is FMP (Fixed Maturity Plan) as compared to FD. But the major gain arises from the tax arbitrage as the FDs are tax at the highest tax bracket of your income whereas these funds are taxed as Capital Gains and are allowed Indexation benefit and due to this the tax is virtually nil on these funds.
The difference in tax leads to post tax return of 9 - 10% approx for these as compared to post tax FD return of 6.5% for investors in 30% tax bracket.
Therefore, even for long term investors it is beneficial to invest in these debt / liquid funds / FMP. The return could higher by about 40% - 50%.
4. There is no fixed tenure for liquid funds and there is no exit load. But on debt funds, the exit load can reduce the exit earlier than six months and it could be upto 0.5%.
FDs charge a higher penalty for earlier exit and the penalty for pre mature withdrawals could work out to more than 1%.
FMPs, however, cannot be exited before the maturity and should be invested only if the funds are completely not needed for the defined period.
Therefore, for those who do not know for how many months the funds can be kept idle / or have funds being accumulated for a defined purpose, these can be parked in liquid funds / debt funds without worrying about the period of investment (ideal for short, medium or long term period) etc.
FMPs of more than 1 year, due to mainly their high return and tax arbitrage, offer very attractive investment fixed return option for idle funds.
There are many and I would like to share some of them :
1. These funds offer very good return in short term i.e. less than six months as compared to FD, the most popular fixed return option. For a period of 1 day to 180 days the rate of return is around the same i.e. 8.5% p.a. as of now whereas the FDs for this period offer only 6 to 7% p.a. maximum.
The taxation impact is same for both for this period.
That means it is good for those who want to park their money for short term period.
2. For medium term period i.e. more than 6 months upto 1 year, the rates are broadly the same for both FD and these funds and there is no difference in tax rate either.
Therefore, it is rate and tax neutral for these investors.
3. If the investment horizon is more than 1 year, the rates could be higher if the chose mode is FMP (Fixed Maturity Plan) as compared to FD. But the major gain arises from the tax arbitrage as the FDs are tax at the highest tax bracket of your income whereas these funds are taxed as Capital Gains and are allowed Indexation benefit and due to this the tax is virtually nil on these funds.
The difference in tax leads to post tax return of 9 - 10% approx for these as compared to post tax FD return of 6.5% for investors in 30% tax bracket.
Therefore, even for long term investors it is beneficial to invest in these debt / liquid funds / FMP. The return could higher by about 40% - 50%.
4. There is no fixed tenure for liquid funds and there is no exit load. But on debt funds, the exit load can reduce the exit earlier than six months and it could be upto 0.5%.
FDs charge a higher penalty for earlier exit and the penalty for pre mature withdrawals could work out to more than 1%.
FMPs, however, cannot be exited before the maturity and should be invested only if the funds are completely not needed for the defined period.
Therefore, for those who do not know for how many months the funds can be kept idle / or have funds being accumulated for a defined purpose, these can be parked in liquid funds / debt funds without worrying about the period of investment (ideal for short, medium or long term period) etc.
FMPs of more than 1 year, due to mainly their high return and tax arbitrage, offer very attractive investment fixed return option for idle funds.
These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog.
For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.
