Should I invest my savings account money in liquid mutual funds; will tax eat away my returns?

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I keep my savings in the bank account. I believe liquid funds give better returns. However, the gains from funds also attract short-term capital gains tax. Won’t the tax eat away my returns?

Rushabh Desai, AMFI registered mutual fund distributor replies: In certain situations liquid funds do have an edge over savings accounts as these are actively managed by an expert fund manager. The returns will depend on which bank you have your account in and which liquid fund you intend to venture into. There are certain banks which can provide higher returns in their savings accounts compared to certain liquid funds and vice versa.

Subject to market risk/changes currently the net yields in the liquid fund category are in the range of 2.9-4.1% and the saving accounts yields of the three largest banks are in the range of 2.7-3.5%. The short-term (36 months or less) income generated from liquid funds will be taxed as per your tax slab. Liquid funds invest in instruments having maturities up to 91 days, thus depending on the fund the ideal holding time horizon in this category should be anywhere between 1 and 3 months. For your immediate savings, a savings account of a reputed bank can be a better bet. You can claim deduction on interest earned up to Rs 10,000 under Section 80TTA. If you have a longer time horizon, you can invest some of your savings in liquid funds from a diversification point of view and do not get carried away by high yields.

I’m 31 and earning. Some of my FDs are maturing and I will soon have Rs 15 lakh to invest. Where can I park this money as a lump sum for 15-20 years to get 8-9% CAGR?

Naveen Kukreja, CEO and Co-Founder, replies: The current interest rate regime would make it difficult to generate annualised returns of 8-9% from fixed income instruments like FDs, debt funds or small savings schemes, at least in the short run. Moreover, for time horizons of 15-20 years, returns from equities as an asset class beat fixed income asset class by a wide margin.

Hence, I will suggest you equally distribute your FD proceeds in the direct plans of these equity funds—Tata Index Sensex Fund or HDFC Index Sensex Fund; and Parag Parikh Flexi Cap Fund or Mirae Asset Emerging Bluechip Fund. Avoid investing lump sum in equity funds due to the stretched valuations in the market. Instead, invest FD maturity proceeds through SIPs of one year. Doing so will reduce the risk posed by stretched valuations and can help average your investment cost during market corrections. Try to route SIP contributions through banks that offer savings account interest rates of 5-6.5% for deposit slabs of `1-10 lakh. Doing so will earn you higher interest income on the FD proceeds parked for SIP contributions.

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