The journey to being financially independent begins with saving early. Each investment one makes needs to be evaluated thoroughly depending on the risk-factor involved and returns. Big or small, savings always begin with setting aside a part of your salary each month in your savings account till your short-term financial goal is achieved. It is only after accumulating enough funds that one looks out at other investment options.
Whether to invest in risk-oriented liquid mutual funds or in a safer option like the fixed deposits or simply keep liquid funds in the savings account.
Before you decide, it’s important to understand the concept of liquid mutual funds and the risks involved. Liquid mutual funds are a type of mutual funds that invest in securities with a residual maturity period of 91 days.
Returns in liquid mutual funds are higher compared to fixed deposits but are not guaranteed as they are subject to how the markets perform. The liquid funds are a good investment for those looking for short-term goals like building on emergency funds or saving to buy something. The maturity period ranges between 10 days and three months.
The liquid funds have very attractive returns of up to 7-9 percent while savings account and fixed deposits earn an average of 4-5 percent. But with fixed deposits one has to wait for them to mature whereas the liquid funds are easy to redeem. The investments can be redeemed anytime depending on your requirement.
The returns earned from liquid funds are tax free. Liquid funds are flexible and there is no cap on minimum balance. Alternatively, the savings account requires the holder to maintain a minimum balance, failing which the banks levy penalties. The interest on your funds is credited quarterly and is taxable income. The returns are comparatively lower. In fixed deposits the interest amount is taxable and tax is deducted at source by the banks when your FD matures.