Why one should park their money in Liquid Funds/Cash Funds?

Liquid funds are getting increasingly popular these days because of the interest rates, safety, and tax advantage that they offer.

Liquid funds invest in treasury bills, government securities, call money, repo and reverse repos and other such instruments that are quite safe in nature and have a short maturity. This means that they are good for parking that part of your money that you would have otherwise put in a bank savings account.

What are Liquid Funds or Cash Funds?

Most of us do have one or more savings bank account or a salary account in which our salary gets credited every month. After all of our monthly expenses like house rent, bills, EMIs etc, we are left with liquid money (disposable) also famous as Monthly Savings. Some of us invest in equity mutual funds, FDs or share market. Most of the people due to their ignorance or laziness, leave the money accumulating in their accounts every month.

Keeping in mind the inflation rate, this gives you negative return on your hard earned money.

Some better financially educated people, put their money in FDs. But that too have some disadvantages. One, fixed deposits are not very liquid. The investor cannot withdraw his money during the term of his deposit. In case he wants to make pre-mature withdrawal he has to pay a penalty. Secondly, the investor has to pay income tax up to 30% on the return.

Where we should keep our hard earned money??

There is a great option to put your money into and have liquidity as well as earn good returns too also.

Best choice is a Liquid Mutual Fund.

Liquid mutual funds are open-ended debt mutual funds. There is zero entry or exit load. They are safe options as they are not invested in equity or markets. These are the best place to invest for short periods of time (even for 1-2 days). Also, they give better returns (post-tax returns) than FDs and savings bank account. Whenever you need the money back, just redeem the funds and amount will be back in your account in max 2 business days.

How much income tax one need to pay on returns from the liquid mutual fund?

In case of a liquid fund with dividend option, dividends declared by mutual funds units are exempt from tax in the hands of recipients.

So next time, your salary comes to your account, Just keep your monthly expenses and transfer rest of the amount into the liquid mutual funds.