Recent times have seen a rationalisation in income funds’ returns. The choice between conventional fixed income instruments like fixed deposits and income schemes is becoming increasingly precarious. Liquidity is one factor amongst others where income funds have an edge over fixed deposits.

Liquidity simply put, means the ease with which your investments can be converted into cash. In the context of fixed income investors who have limited options at their disposal, liquidity can assume prime importance.

For fixed income investors stability is often the drawing force i.e. the returns are assured with no scope for ambiguity. However this stability comes at a price. Should an emergency arise liquidating the investment is easier said than done. And often there is a penalty involved for premature withdrawal. This is true for fixed deposits e.g. it is commonly observed that withdrawal is not permitted within 3 months from making the deposit and if a withdrawal is made between 3 months to 6 months the principal amount is returned without interest payment. Effectively the investor is penalised for liquidating his own investment.

On the other hand, investors in mutual funds can exit their schemes without incurring any expenses. Critics might point out that exit loads are in place in income schemes as well which puts them on par with fixed deposits. We beg to differ! Exit loads are levied for differing time periods in accordance with the scheme’s nature e.g. 3 months in case of long-term income funds and 15 days for short-term plans. Further these loads are charged as a percentage of the exit amount, 0.5% in the case of income funds etc. – a better deal than what fixed deposits offer.

Now let’s consider a more vital aspect, the opportunity to move between asset classes. Liquidity plays a crucial role if you wish to grab an attractive investment opportunity. E.g. for someone who wants to participate in the rising equity markets like the present one, mobilizing funds from a fixed deposit can be an arduous task. It would involve cumbersome paperwork, surrendering the fixed deposit receipt, getting funds transferred to the bank account and then proceeding with the investment. There’s a fair chance that you might lose out on the opportunity by the time this long winding process ends. On the other hand, shifting between mutual fund schemes of the same fund house simply involves handing over the transaction slip (with the switch request) to the asset management company.

If contending with moderate returns was not bad enough, fixed deposits may also cost you a smart investment opportunity. A costly miss if you are a prudent investor!

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