Liquid funds provides higher post-tax returns with a reasonable degree of safety & are attractive alternative to savings deposits: Crisil

May 30, 2011: A majority of Indians continue to park a large amount of funds in savings bank accounts. As of March 31, 2010, money in such accounts in scheduled commercial banks stood at Rs 11.36 trillion. The size of savings bank deposits have continued to grow, despite yielding only nominal returns.

A recent study carried out by CRISIL FundServices concludes that liquid funds offer an attractive alternative to retail investors vis--vis parking idle funds in a savings bank account. Not only do liquid funds offer higher post-tax returns, they also provide a reasonable degree of safety in terms of the principal invested. Moreover, these investments are highly liquid. Over the last 5 years, liquid funds have given an annualised post-tax return of 5.78% as compared to 2.5% given by a savings bank account.

According to Mukesh Agarwal, Senior Director - CRISIL Research, "Beyond returns, liquid funds also have advantages in terms of liquidity, safety and portability. They can be redeemed within 24 hours and have no exit load. Further, liquid funds invest in securities with a maximum maturity of 91 days, which cuts down the credit risk. Most liquid fund schemes are also highly rated (P1+f), signifying very strong protection against losses from credit defaults."

Within liquid funds the dividend option is more tax-efficient. This option would be more suitable for investors who fall within the 20% and 30% tax brackets, as it attracts a lower dividend distribution tax of 12.5%. Post tax deduction, liquid funds yield better returns vis--vis savings accounts and fixed deposits, wherein the interest earned would be taxed based on an individual's tax slab.

However Crisil release adds that It is important to note that liquid funds are not totally risk-free and an investor must carry out basic checks before investing. Factors such as the fund house and the scheme vintage, overall assets under management (AUM) of the mutual fund, consistent performance over a longer period and comparison of the scheme with appropriate benchmarks can be looked at for selecting the right fund.

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