How to invest in liquid funds?
Annual return from liquid funds are far superior than short term returns and reinvestment into dividends of the liquid fund gives much more positive impact to the overall investment.
I will receive Rs.15 lakh from the sale proceeds of a small plot that I owned. I will need this money to pay for a house I am looking for, but it will take a couple of months before I can zero in on one. I wish to invest this money for 45 to 90 days. I have heard that liquid funds are a good option; please suggest the best possible option. - Deepak Kumar Garg, Ludhiana
The returns from bank FDs for a year are about 7.25 per cent and that from a savings bank account stand at 6 per cent, at best. In comparison, the three-month return from liquid funds is about 3 per cent and the annual return from liquid funds is above 8 per cent, which makes it far superior to returns from the bank. However, given the short duration for which you are planning to invest, you should also take into account the tax implications that might crop up. For instance, if the interest earned on bank FDs exceeds Rs.10, 000 during a financial year, it will be taxed as per your slab rate. Liquid funds, on the other hand, attract short-term capital gains (STCG) tax if redeemed before completion of a year. If you opt for dividend reinvestment option of a liquid fund, the dividends will be considered fresh investments and reinvested as units, which, in turn, would minimise your capital gains.
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