Investors who have money for short-term say 15-30 days generally invest in short-term fixed deposits with the banks. Banks give a fixed rate in the range 5%-5.5% p.a. for a term of 15-30 days. But how do these returns compare with those offered by liquid funds, a comparable investment products? Here we have made a brief study for our investors as to which is the right investment option for short-term investment.
| Bank Name |
* Interest (%) |
| IDBI BANK |
5.25 |
| STATE BANK OF INDIA |
5.25 |
| HDFC BANK |
5.00 |
| ICICI BANK |
5.00 |
| UTI BANK |
5.00 |
* The rates are on annual
basis for a deposit of 15-30 days
Most of the banks considered in the above table give a fixed rate of return of over 5% p.a. for tenure of 15-30 days. However, when tax is considered the actual returns on these deposits falls to 3.5% p.a. These returns are surely unattractive!
| OPEN-ENDED, LIQUID FUNDS |
NAV (Rs) |
1-MONTH |
12-MONTHS |
| Templeton Liquid Fund (D) |
10.002 |
0.4% |
6.9% |
| JM High Liquidity (D) |
11.520 |
0.5% |
6.8% |
| Pioneer ITI Treasury Mgmt. (D) |
1,160.170 |
0.5% |
7.7% |
| Pru ICICI Liquid (D) |
11.830 |
0.5% |
7.3% |
The above table shows the performance of a few liquid funds. As you will notice, all these funds have given tax-free returns of over 6.5% per annum. Liquid funds by all means are better than deposits. Liquid funds generally declare a weekly dividend, which is reinvested back at the ex-dividend NAV (net asset value). Also the minimum investment in these funds is as low as Rs 1,000/- in the case of JM High Liquidity Fund.
Other factors that you need to consider:
Fixed returns:
Deposits give fixed returns to the investor. However, liquid funds don't give a fixed return to the investor but it is clear from the above study that liquid funds give higher returns as compared to the deposits.
Tax efficiency:
Dividends from liquid funds are tax-free in the hands of investor, which is why they are more attractive than deposits. Returns from deposits are taxable depending on the tax bracket of the investor, which considerably pulls down the actual return (unless of course the interest earned does not exceed the 80 L limit).
Let's take an example of two investors A and B who invest in fixed deposit and Liquid fund respectively. Both are in the highest tax bracket and invest for a tenure of 30 days.
A makes a deposit of Rs 500,000 in HDFC Bank at the rate of 5% p.a. for a tenure of 30 days and B invests in Templeton (I) Liquid fund for the same period and amount.
A's investment
| HDFC Bank |
Amount (Rs) |
| Investment |
500,000 |
| *Return (y) |
2,000 |
| Tax paid (30.6%) (z) |
612 |
| Actual return (y-z) |
1,388 |
| Return on Investment (30 days) |
0.28% |
(Return is considered @ of 5% p.a. for 30 days)
B's investment
| Templeton Liquid Fund (Dividend) |
Amount (Rs) |
| Investment |
500,000 |
| *Return (y) |
2,000 |
| Tax paid (30.6%) (z) |
- |
| Actual return (y-z) |
2,000 |
| Return on Investment (30 days) |
0.40% |
(*Return is considered on the dividend declared in last 30 days)
The above example shows that B gains more than A when tax is taken into consideration.
Liquidity:
Deposits marginally score over liquid funds as far as liquidity is concerned. In bank deposits the investor's bank account is credited as soon as his FDR (fixed deposit receipt) is surrendered to the bank. However, in case of liquid funds the investor has to give a redemption request to the fund within the cut off time to receive that days NAV and the cheque is issued to him on the next working day. However, some funds give the facility of crediting the investor's bank account e.g. Franklin Templeton gives this facility to the HDFC bank account holders.
Factoring in all these factors, liquid funds do emerge as a better option as compared to fixed deposits. However, while investing money in these funds investors need to carefully evaluate the fund's performance. There is a possibility that liquid funds may not deliver in terms of expected returns owing to market factors. Therefore, if you have Rs 100 to invest, you should probably split the money between a liquid fund and a fixed deposit.
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