By Joydeep Sen
For parking your brief-term funds, which are meant for emergencies or might be essential at a brief notice, you can utilise your bank savings account or liquid schemes of mutual funds. Earlier, these two had been more or much less at an even keel. Nowadays, due to particular causes, the appeal of liquid funds is much less than earlier.
Returns are on the reduce side due to the quick interest price policy followed by Reserve Bank of India, someplace about 3% annualised. There is an exit load up to seven days, which implies if you exit inside seven days of investment, there would be a penalty. Dividends from mutual funds (MF) schemes are taxable in the hands of investors from April 1, 2020. Interest from banks is taxable at your slab price as properly. Hence MF dividends and bank interest are taxable at the very same price, which is your slab price.
While bank interest prices have dropped as properly due to RBI’s quick interest price policy, there are a handful of banks providing fairly superior interest prices in their savings account. There is no exit penalty in a savings account.
Comparison
Safety ought to be the very first concern in any investment. Generally, each liquid funds and banks are secure. Still, do some minimum due diligence. For MFs, look at the pedigree of the AMC / the goodwill of the sponsor group and the good quality of the portfolio which is out there on the web page of the MF. Though it might appear that “a bank is a bank”, pedigree is relevant. Investors ought to choose public sector banks or top private sector banks.
Both are liquid. The seven-day exit load in liquid funds is an exit load, not an absolute lock-in. Nowadays investment execution is moving on line. Banks are providing mobile phone based apps, but good quality or smoothness of app-based transactions might differ from bank to bank. MF transactions, i.e., obtain and redemption can be accomplished on line.
On returns, the comparison is in between liquid funds’ previous returns and banks’ future contractual returns. Mutual funds can’t indicate future returns, therefore previous returns are taken as a proxy. Taking a ballpark of 3% annualised for liquid funds, you can examine it with the price presented by a variety of banks.
For execution, in liquid funds you might either do it your self if you are world wide web savvy or go by way of a MF distributor. There are no separate charges payable to the distributor, it is constructed-in in the operating costs charged to the fund. The returns from liquid funds described above are net of operating costs. For banks, you might verify the smoothness of the app-based execution.
The other selection you might take into consideration is bank term deposits. For your emergency fund, although there is no defined time horizon, occasionally the funds lie for a lengthy time. Bank term deposits are liquid, i.e., can be prematurely withdrawn, but there might be a pre-mature withdrawal penalty. If the term deposit prices are eye-catching or superior than liquid fund returns, you might take into consideration that as properly, maintaining in thoughts the price of penalty.
Conclusion
The investor ought to not be blown away by the price presented by the bank, maintaining in thoughts the incidents that have occurred with particular banks. There is an insurance coverage beneath the Deposit Insurance Credit Guarantee Corporation Act (DICGC), which is now Rs 5 lakh per bank against Rs 1 lakh earlier. However, the DICGC cover ought to not be the logic for your investments go with a bank that does not demand the DICGC cover.
Secure & LIQUID
Generally, each liquid funds and banks are secure. Still, do some minimum due diligence.
The seven-day exit load in liquid funds is an exit load, not an absolute lock-in.
Taking a ballpark of 3% annualised for liquid funds, you can examine it with the price presented by a variety of banks.
If the term deposit prices are eye-catching or superior than liquid fund returns, you might take into consideration that as properly, maintaining in thoughts the price of penalty.
The writer is a corporate trainer (debt markets) and an author.