Why are liquid funds better than traditional investment?
Traditional instruments like bank fixed deposits have been a convenient investment option for many. As these deposits offer a guaranteed return with no risk factor, individuals prefer these fixed deposits for the short term. Since the interest rates on fixed deposits have been decreasing sharply over the last few years, investors are trying to migrate towards other forms of investment. This is where liquid mutual funds enter the picture. Let us check out how liquid funds compare with these traditional investment options.
Returns
The rate of interest in fixed deposits is specified. They would not change during the period of investment. The longer the duration, the higher is the rate of interest. The returns from liquid funds are not fixed. The returns of investment depend on the ups and downs of the market. The best mutual funds carry a high level of risk but also offer good returns. Liquid mutual funds offer return rates quite similar to fixed deposits. You can count the returns about 1% higher than what you would get from a normal fixed deposit.
Liquidity
Liquidity refers to the ease at which money can be taken out of the investment. The investments in liquid funds are quite liquid, especially in terms of investment duration when compared to traditional fixed deposits. These deposits have a fixed tenure. They have very low liquidity. The investment in a fixed deposit would be locked for the duration of the investment period. Premature withdrawals would require you to pay the penalty. Liquid mutual funds, on the other hand, can be redeemed at any point in time. An exit load might be charged if you redeem within a week. The proceedings are credited within 1-2 days.
Taxation
A reason why a lot of people invest is to save taxes. The tax treatment needs to be considered before we pay taxes. When it comes to fixed deposits, the tax is levied according to your current tax slab. The thing is that the income that you earn from the fixed deposit is added to the total income, which is then taxed. Also, if the interest earned through fixed deposit is more than Rs. 10,000 in a financial year, the bank would deduct TDS at the rate of 10%. For mutual funds, the tax depends on the type of fund and the length of the period for which it is held. But it is much less compared to fixed deposits.
Availability of funds
Liquid funds are great for holding money for a short period of time. So, these funds would allow you to invest money in the same portfolio at any time of your choosing. SIP is very common in mutual funds. It creates financial discipline and diversifies the risk that can arise in your portfolio. You even have the option to invest your lump sum in mutual funds when you have a huge sum that you want to invest.
These are some of the reasons why liquid funds should be preferred over traditional investments.