Put your idle money to work by investing in liquid mutual funds

Liquid funds offer very high liquidity.

Most of us tend to have money lying idle in our savings bank accounts. We keep money in these accounts because we can draw on it at any time using a debit card or use it to pay utility bills, credit card bills and other expenses, whether online or, in increasingly rare instances, by cheque. However, there is an opportunity cost to keeping large sums of money in our savings bank accounts. Most banks pay 3.50-4 percent interest on balances in savings bank accounts, below the rate of inflation.

Therefore, while a savings bank account offers the convenience of “anytime money”, your money is less productive. Money market mutual funds such as liquid funds and overnight funds offer convenience, liquidity and a high degree of safety, and much better returns than savings accounts for money that you may not need for a few days, few weeks or few months.

Liquid funds invest primarily in money market instruments such as treasury bills, certificates of deposit, commercial papers, etc., that have a residual maturity of less than or equal to 91 days, with the objective of providing investors an opportunity to earn higher returns on very short-term deposits.

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As the name suggests, these funds offer very high liquidity. There is no exit load in overnight funds and up to six days for liquid funds. You can draw your money at any time, partially or fully, without any penalty or charges. Withdrawals from liquid funds are processed within 24 hours on working days.

Benefits of liquid funds

Highly rated papers: Liquid funds invest in highly rated money market instruments, which entail the least risk, ensuring that your money is safe.

Better yields: Liquid funds can give returns 2–4 percentage points higher than savings bank accounts. They are ideal solutions for accruing stable income from your idle funds. From time to time, you receive large one-time cash flows like bonus, investment maturity proceeds (for example, a fixed deposit, public provident fund account or life insurance policy maturing).

If after such an event you have, say, a balance of Rs 10 lakh in your savings bank account, you can get Rs 20,000 to Rs 40,000 additional income a year by investing it in liquid funds. This may not seem a big amount, but can go a long way towards, for instance, buying someone a thoughtful gift. Importantly, this also helps you to create a habit of investing.

If you want to access the entire sum, it's not a problem. In fact, some asset management companies' (AMCs) mutual funds offer instant redemptions in liquid funds. Redemptions made through the AMC portal or mobile app in such schemes gets credited to your savings bank account within just a few minutes.

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While they make better investment sense than savings bank accounts, bear in mind that liquid funds' returns depend on prevailing money market rates. Money market rates change with changes in interest rates in the economy.

Moreover, unlike in the case of savings bank accounts, there is no TDS or tax deducted at source on returns accrued in liquid funds (for resident investors only).

In conclusion, it’s essential to ensure that your money is working for you optimally, even in the short term. As with any investment, it’s advisable to consult with a financial advisor to ensure that these funds align with your overall financial strategy and risk tolerance.