Liquid Funds - A good option to save money

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Liquid Funds - A good option to save money





Most people in their 20s experience a sense of financial freedom when they receive their first pay cheque. Typically, they do not know what to do with their hard-earned money and the immediate urge is to start spending as it is the first time they have seen some funds of their own. Also, very often, they keep their funds idle in a savings bank account.

Unfortunately, letting money remain idle in a savings bank account is usually a passive decision, that is it happens because we take no decision. The same money can be invested in liquid funds to gain greater returns and, at the same time, we do not have to compromise on liquidity. In short, liquid funds can be used as a "supplement" to a savings bank account.

T h o u g h l i q u i d funds do not guarantee that there will be no erosion of capital, the chances of capital loss are extremely negligible as income is generated primarily on interest accrual. They are the least risky and least volatile category of mutual funds. For example, if you had invested in a liquid fund and held the investment for one month anytime during the past five years, you would have made a minimum return of 5.67% per annum and a maximum of 9.15% (data as on June 16, 2014).

Despite the de-regulation of interest rates on savings bank accounts by the RBI, only a few banks offer 6-7% per annum, with most still offering just 4%.

Thus, liquid funds offer an extremely good option to park funds.

In the current high interest rate scenario, liquid funds, as a category, delivered returns of 10.13% and 9.76% for financial years 2013 and 2014, respectively. In fact, the minimum return given by any liquid fund during these financial years was 6.98% for 2013 and 7.29% for 2014, which is still much higher than the 4% interest rate offered on your savings account (see table `Earning Higher Returns').

This, in our opinion, is the first step a youngster needs to take before getting into full-fledged investments. This will enable a young person to cultivate the habit of saving and slowly progress to wards investments from debt to equity in a gradual manner.

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