A recent study by Crisil FundServices has said liquid funds are an attractive alternative for retail investors to park their funds lying idle in savings bank accounts. The reason: they offer higher post-tax returns, are liquid and provide a reasonable degree of safety in terms of the principal invested.
Over the last five years, liquid funds (Crisil fund rank 1 on the index for liquid funds) have given an annualised post-tax return of 5.78 per cent as compared to 2.5 per cent given by a savings bank account.
Despite this disparity in returns, a majority of Indians continue to park a large amount of funds in savings bank accounts. As of March 31, 2010, money in such accounts in scheduled commercial banks stood at Rs 11.36 trillion.
According to Mukesh Agarwal, senior director, Crisil Research, “Beyond returns, liquid funds also have advantages in terms of liquidity, safety and portability. They can be redeemed within 24 hours and have no exit load. Further, liquid funds invest in securities with a maximum maturity of 91 days, which cuts down the credit risk. Most liquid fund schemes are also highly rated (P1+f), signifying very strong protection against losses from credit defaults.”
Within liquid funds, the dividend option is more tax-efficient. This option would be more suitable for investors who fall within the 20 and 30 per cent tax brackets, as it attracts a lower dividend distribution tax of 12.5 per cent.
Post tax deductions, liquid funds yield better returns as compared to savings accounts and fixed deposits, wherein the interest earned would be taxed based on an individual’s tax slab.
Tarun Bhatia, director, capital markets, Crisil Research, says, “It is important to note that liquid funds are not totally risk-free and an investor must carry out basic checks before investing. Factors such as the fund house and the scheme vintage, overall assets under management (AUM) of the mutual fund, consistent performance over a long period and comparison of the scheme with the appropriate benchmarks can be looked at for selecting the right fund.”
