Liquid Plus funds – a better option to park your short term funds!!

One of the most common issues faced by all of us is how to efficiently manage short term liquidity. Normally we leave the funds lying in our Saving Bank account which earns a low interest rate of 3.5% that too, on the lowest balance in the month. One of the efficient ways of managing short term funds is to park it in "Liquid mutual funds". Liquid mutual funds have emerged as an attractive alternative to park funds needed at short notice. The post tax returns are better than savings bank accounts.


Liquid mutual funds park their assets in debt securities which earns interest in relation to the prevailing interest rates in the economy. There are two types of liquid funds, namely, Liquid Funds and Liquid Funds Plus. Liquid funds cannot have debt securities with more than 1 year maturity. Liquid Plus funds can hold debt securities in their portfolio with more than 1 year maturity.


In the 2007 Union Budget the dividend distribution tax (DDT) for liquid funds was increased from 14.03% to 28.30%. For liquid plus funds the DDT remains at 14%. This has made liquid plus funds more attractive. This has lead to the announcement of a flurry of liquid plus funds by different fund houses. Redemption is possible in a couple of days. The tax treatment for liquid funds makes it attractive to opt for a regular dividend payout option.


Returns:
In terms of returns, liquid plus funds compare favorably with category returns of 8.31% over the last one year. Of the available options, funds like Canara Robeco Liquid Plus Retail and HDFC Cash Management Saving Plus Retail have a good three year track record. Due to favorable returns, these funds have seen significant inflows. Reliance Mutual Funds liquid plus funds manages a total corpus of more than Rs6000 crores. Amongst the top twenty mutual funds (by AUM), there are four liquid plus funds.


Suitability of the product:
They are suitable for investors with surplus short-term funds and not sure when it would be required. A liquid fund provides excellent opportunity to park your short term funds at a higher rate compared to savings bank account. It also provides you with the flexibility to break the investment partially without compromising on the returns based on your funds requirement. It is also tax efficient compared to bank deposits which are taxed at a higher rate (say at 30% for income in excess of Rs2.5 lakhs for Financial year 2007-08).

However please note that the time for redemption of a liquid plus fund is a week. They also attract marginally higher administration charges (around 20 basis points) than liquid funds.


For parking short-term funds, we can also look at other categories of funds like arbitrage funds, which we will discuss later.