I want to invest ₹15 lakh for a short period of 45 to 90 days. I have heard that liquid funds are a good option. Presently, bank FDs would fetch me about 7.25 per cent and savings account, about 6 per cent. I also checked the best performing mutual funds on your site and found that the best possible return offered was about 3 per cent. Is this 3 per cent annual or compounded? Please suggest the best possible option. - Niraj Banyal
The 3% return you have observed is not for one year. The returns of 7.25% on bank FDs and 6% on Savings Account are annual returns whereas the 3% return stated on our website for liquid funds is their three-month return. The return on liquid funds during the last one year stood at 9.05 percent as on May 22, 2014. So, if you base your selection on the basis of returns, liquid funds win hands down.
You also need to consider the taxation aspect. If interest earned on Bank FDs exceeds ₹10,000 during a financial year, it will be taxed as per your slab rate. Liquid funds, on the other hand attract Short Term Capital Gain Tax if redeemed before completion of an year. If you opt for Dividend Reinvestment option, dividends will be considered fresh investments and reinvested as units which in turn would minimize your capital gains. Liquid funds come out as clear winners.
This article was originally published on July 10, 2014.
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