Juzer Gabajiwala

With inflation steadily low, the Reserve Bank of India has once again signaled lower interest rates by reducing its own benchmark rates. Consequently, we first saw a cut in the deposit rates and are now witnessing a rate cut even in savings bank account interest rates. State Bank of India (SBI), the country’s largest lender and most other private sector banks have initiated a cut in their interest rates on savings accounts from 4 to 3.5 percent p.a. Thus, the interest earning on the bank balances have gone down. On the face of it, this may look like a marginal fall of 0.5 percent; but it is a drop of 12.5 percent in the earnings per year. To compound the matter; we do not even know how the interest is calculated. To put it very simply, if you earned interest of Rs. 10,000 for the year last year, from here on, you will earn Rs. 8,750 on the same level of savings.

Another problem which a depositor has to grapple with is “hacking”. We have read and heard of numerous instances where a lot of bank account holders have seen their money vanishing from their bank accounts and we are not sure how many of them have ever got their money back. Internet fraud is the new type of robbery which many of us are ill-equipped to handle.

So is there an alternative to savings account which provides better returns with liquidity and safety?

The answer is YES. One should look at liquid fund as an alternative to a savings account.

What is a Liquid Fund?

These funds invest in highly liquid government instruments. You can invest even for a day and get your funds back the next business day. It offers individuals and corporate investors an alternative (to savings/current account) for parking their surplus cash, for the short term. You could earn nearly 100% more returns than your savings bank account.

Saving Bank A/c Liquid Fund Returns (% p.a.) 3.5%(Fixed) 6.5-7% (Not Fixed) Taxable Yes above Rs. 10,000^ Yes Instant Liquidity Yes Yes* Safety Account can be hacked No Hacking Risk

^Savings bank interest up to Rs. 10,000 is not taxable.

This facility is only available for Resident individual investors.

Is the dividend option available in liquid funds? Yes, Liquid funds offer two options: Growth and Dividend. In the dividend option, you have to select the frequency of dividends- daily / weekly/ monthly options are available. However, the dividends are not fixed.

Which option is tax-efficient? Dividends are not taxed directly in the hands of the investor but a Dividend Distribution Tax (DDT) of 28.84% is applicable for units held by Resident individuals, HUFs and NRIs and 34.608% for Domestic Corporates is deducted by mutual fund houses before paying dividends. Ideally, the growth option should be the preferred option for investors.

Now, a few liquid funds like Reliance Liquid- Treasury Plan, DSP Blackrock Money Manager and IDFC Cash Fund also provides an instant cash / liquidity facility, 24X7 up to Rs. 50,000 or 90% of the current market value, whichever is less. This means that one can redeem and get the funds back within 30 minutes. This facility is available even if you are withdrawing funds in the middle of the night or on a holiday. You can place a withdrawal and go to an ATM and withdraw funds.