Liquid funds yield higher returns than savings account, finds study

Liquid funds, which typically invest in Certificates of Deposits (CDs) and Commercial Papers (CPs), have delivered superior returns compared with savings accounts of banks, according to a study by Crisil.

The study shows that over the last five years, liquid funds have given an annualised post-tax return of 5.78% while savings accounts have yielded just 2.5%. Currently, around R2.22 lakh crore of the total assets under management of the mutual fund industry (of R7.85 lakh crore) are parked in liquid funds.

Since the yield curve at present is inverted with short-term rates that are higher than long-term rates, the trend could continue for a while. Liquid schemes might turn out to be a better place to park one’s savings. That’s despite the fact that interest rate on savings bank accounts have been upped to 4% since the start of the month, from 3.5% earlier.

“Historically liquid funds have given higher returns against banks’ savings accounts and in the last few months returns have further improved thanks to short-term rates moving up,” says Mahendra Jajoo, ED and CIO, fixed income at Pramerica Mutual Fund.

In the last one year, liquid fund schemes, on an average, have given a return of over 6.84% with some schemes having managed as much as 7-8.5%.

Liquid schemes are aimed at providing easy liquidity to investors while preserving their capital and giving them modest returns. These schemes invest in safer short-term instruments such as treasury bills, CDs, CPs in the call money market.

Market participants say that as of now over 60-80% of the corpus is invested in bank CDs. Currently three-month bank CDs can yield almost 10% 9.8%, while companies are borrowing through CPs at 10.5% for three months.

According to data provided by the Association of Mutual Funds in India (Amfi) so far in 2011, liquid schemes have seen inflows of over R1.30 lakh crore. Dwijendra Srivastava, head, fixed income at Sundaram MF says, “It’s not just returns, these schemes are more tax-effective than saving accounts.”

Dividends come tax-free in the hands of investors though funds pay dividend distribution tax at the rate of 27.68% (25% plus, 7.5% surcharge and 3% education cess). Short- term capital gains tax is levied at the maximum marginal rate applicable while long-term capital gains tax is payable at the rate of 10% without indexation benefits and 20% with indexation benefits.

While market regulator Sebi has changed the valuation method for liquid schemes, in 2010, it hasn’t impacted inflows into liquid schemes.

“We have had time to reshuffle the portfolios and corporates and banks continue to remain key investors,” says Jajoo. Sebi had asked funds to mark to market money securities with a maturity of up to 91 days rather than securities maturing in 180 days.

Source: http://www.financialexpress.com/news/Liquid-funds-yield-higher-returns-than-savings-account--finds-study/797255/#