Park your savings or fix deposit in Liquid Funds and get the same Effect, Interest without Locking.
The returns from liquid funds don't vary much as they invest in same universe of money market securities. However, investors should select liquid funds from reputed AMCs and funds that have substantial assets under management (AUM). Liquid funds come with different distribution options e.g. growth plan, daily dividend plan, monthly plan. You should consider your tax situation, when you decide which plan to invest in.short term capital gains from liquid funds are taxed at the applicable income tax slab rate of the investor.
Dividends from liquid funds are tax free in the hands of the investors, but the fund houses have to pay a dividend distribution tax (DDT) of 28.325% before distributing dividends to the investors. If you fall in the 10% or 20% tax bracket, you should invest in the growth plan, since your tax rate is lower than the dividend distribution tax rate. On the other hand, if you are in the highest tax bracket (30%), then dividend re-investment will be smarter option from a tax perspective.
How do Parking Fund work?
Where do we park our surplus cash? Most of us keep it in our savings bank account. If we need to use the cash on a regular basis, savings bank indeed is the best option. It is safe and it is convenient. We can withdraw cash from our savings bank account at any time, using our ATM or debit card. However, investors should, from time to time, take a look at their savings bank account statement and ask themselves, how much balance they should have in their savings bank account? Financial planners suggest that, we should have six months of emergency funds. But we sometimes have much more than that in our savings bank account. Investors often keep funds parked in their savings bank while waiting for suitable investment opportunities or an upcoming expense. If you do not intend to use your funds for a more than year, investing it in fixed deposits or fixed maturity plans (FMPs) is a better option.
Fixed deposits or FMPs give a pre-tax return of 9 - 10%, whereas the savings bank interest rate is usually only 4% and that too fully taxable. However if you do not want to lock your funds for a year, then liquid funds or ultra short-term debt funds are better options than savings bank in terms of return on your investment. Liquid funds and ultra short term debt funds can give pre-tax returns of 9 – 10%, compared to the 4% interest paid by savings bank.