The word ‘Liquid funds' uttered amidst a group of people surely would gather some myriad different reactions from the public, who would either be too confused or interested but possessing a little knowledge about the subject.
Liquid funds in India is seen as a substitute to fixed deposits in banks as their investments usually deals in lower risk debts and securities in the money market. The interest that these securities earn and any gain that they make on the market price is then forwarded to the investors after a day-to-day Net Asset Value (NAV) of units. These securities are redeemable and can be redeemed at any point of time.
Investment In a liquid fund is considerably safe as the shift or change is price movement is low as compared to other securities. The interest that the investment accumulates gets added to the NAV. Investing in liquid fund is thus, a popular as well as smart choice for a short-term investment.
But then, the question is how do you make a choice when comparing liquid fund returns to fixed deposit interest? Is investing in liquid funds really worth? Where do liquid fund returns stand as compared to fixed deposit interest?
All these queries and more needs to be satiated with enough backed up data. And so we bring for you a complete guide on liquid funds and their returns as compared to fixed deposit interest.
Liquid Fund Returns
Liquid funds, like all other investments, reinvests your money in securities with a market value. Naturally, it bears a risk as if the market value of the security invested in goes down, there are probable chances of loss to the customers from the liquid fund investment. But as mentioned earlier, the market value fluctuation in case of liquid funds are quite low as compared to other equity investments.
There is a reason that liquid funds are considered a safe investment considerably. The reason traces to the rules laid down by the Securities Exchange Board of India (SEBI) which states that any security that matures within a span of 60 days, it need not be marked to market. The interest component is just added. Therefore, it may be viewed as a steady and safe increase in the amount invested.
However, the Securities that mature between 60 to 91 days are market securities as they need to make it to the market and the NAV of the fund depends on it. Suppose the company you invested in reinvested the amount in an underlying company that defaulted in the re-payment of the principle amount as well as the return. That ultimately would bear an affect on the amount you invested and lower the NAV. The returns given by liquid fund in the past years have been enoughly good to keep people interested. It gave out a return of 6.56% which is a way more than interest given out on savings deposit @3.5%.
Features of Liquid Funds
Liquid Fund has some characteristic features and these are as follows:
- Liquid Funds come with a zero lock in period
- The funds may be redeemed within a single working day making it a great choice for short-tern investment
- Selling the funds before 2 pm will get you the funds on the same day. Selling it after 2 pm will get the funds transferred your account next morning.
- No entry or exit loads
- The returns range between 4%-8% per annum
- Offers flexibility; Comes with various plans such as growth plan, dividend plan, daily dividend plan, weekly dividend plan, monthly dividend plan.
- Investors are free to invest in direct plans
SBI Fixed Deposit Rates
Fixed Deposit is the safest form of investment with higher return. But the rate at which the returns are given out vary from bank to bank and vary as per the maturity period. State Bank of India, the oldest bank in India, is a government owner institute that offers a different set of SBI fixed deposit rates for its Fixed Deposit accounts. Let us have a look at the rates at which it offered returns on its Fixed Deposit accounts.
| Tenure | Interest Rates for regular deposit | Interest Rates for Senior Citizens |
| 7 to 45 days | 5.50% | 6.00% |
| 46 to 179 days | 6.50% | 7.00% |
| 180 to 210 days | 6.50% | 7.00% |
| 211 to 364 days | 6.50% | 7.00% |
| 1 year | 6.50% | 7.00% |
| 1 year 1 day to 1 year 364 days | 6.50% | 7.00% |
| 2 years to 10 years | 6.25% | 6.75% |
There are 4 basic points that would make the difference between liquid funds and fixed deposit clear. Let's take a look:
- Returns- Investing in short term securities, liquid funds offer returns that range from 4%-8% whereas banks offer an interest on fixed deposit at 4%-9% depending on the tenure of deposit.
- Tax Treatments- The dividend from liquid mutual funds received by the investor lies tax free in his hands. Therefore, there is no change in tax treatment of liquid plans and fixed deposits.
- Redemption- If you sell the liquid funds before 2 pm you get the money immediately. If you sell it after 2 pm, the amount gets credited in your account the next day. On the other hand, fixed deposits can be closed immediately. One just has to drop an application stating premature closure of the account.
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