Got a little bit of extra money lying around? The first savings instrument for most of us is into a bank Fixed deposit (FD). A fixed deposit is safe, you know the rate of interest upfront, but there may be penalties if you ask for your money back earlier.
If you’re thinking of parking your money for the short term, you should also consider a type of mutual fund called liquid funds. Liquid funds are an ideal alternative to fixed deposits because that they invest in low-risk debt and money market securities. The income earned by the mutual fund is then passed on to the investors in that mutual fund.
Unlike FDs, liquid funds do not promise any returns upfront. Because they earn returns by investing in instruments where prices can fluctuate depending on market rates, their returns can rise or fall. But well-run liquid funds are generally considered as safe as FDs and generally beat the interest rate earned on FDs of similar duration. You have the flexibility to redeem your money within just one working day with no penalties for early withdrawal, and the convenience of switching your money into other mutual funds as and when you feel like.
When you’re picking the investment option in a liquid fund, it makes sense to select growth if you are in the 10% or 20% tax bracket and the daily dividend reinvest option if you fall in the 30% tax bracket.
These days, online investment advisors allow you to set up an account, connect to your bank and start investing in mutual funds from any mutual fund company a matter of minutes.
A DASH OF RISK
- Well-run liquid funds are generally considered as safe as FDs and generally beat the interest rate earned on FDs of similar duration
- You have the flexibility to redeem your money within just one working day with no penalties for early withdrawal
The writer is CEO & founder of Clearfunds.com
