Liquid funds offer an interest rate of 5-5.25%. The short-term FD rates at most banks are 3.25% to 3.75%. The Savings Bank account interest rate is around 3%.

Date : 11/08/2022
Read: 3 mins

Liquid funds offer better returns than FDs.

This year, the RBI has hiked the repo rates by 140 bps. The RBI hiked the repo rate by 40 bps in an unscheduled policy meeting in May this year. It was further hiked by 50 bps in the June monetary policy meeting. The repo rate was further hiked by 50 bps in the August monetary policy meeting.

The FD rates have not increased with the repo rate hikes. In this environment, liquid funds seem to be a good choice. The liquid funds offer an interest rate of 5-5.25%. The short-term FD rates at most banks are 3.25% to 3.75%. The Savings Bank account interest rate is around 3%. This means that the liquid funds are offering an extra return of almost 2%.

Why this sudden outperformance of liquid funds?

Liquid funds have been underperforming the FD rates for some time now. The reason for the underperformance was the low-interest rate environment. Now that the repo rate has normalised to more than the pre-covid levels, the returns on the liquid funds are more than 5%. Earlier, when the returns were only 2.5% or so, most HNIs withdrew their funds from liquid funds. The number of liquid fund folios decreased from 2.141 million in July 2021 to 1.75 million in June 2022. Although the total AUM in liquid funds increased from Rs 3.8 Lakh crores to Rs 4.05 lakh crores, the increase is pretty small.

This means that the liquid funds have been underperforming for a very long time, and it looks like now might be a good time to invest in liquid funds. Liquid funds look even better, with the repo rate expected to increase by 50-75 bps more this year. How much will the repo rate increase is anybody’s guess, but the consensus is that the repo rate will increase further this year. As per Sandeep Bagla, CEO of Trust Mutual Fund, the repo rates could increase further by 50 bps, and he is asking the investors to invest in liquid funds for now.

Liquid funds are popular amongst HNIs who invest in these funds to stagger their entry into equities. Liquid funds are a good way to earn short-term returns and earn some extra money for short-term deposits. Liquid funds are considered very safe in the category of debt mutual funds. They invest in T-Bills, commercial papers, and money market securities for up to 91 days only.

Liquid funds are a good way to keep your money safe and earn some extra returns over the savings account. In the current environment of increasing repo rates, the liquid funds are offering almost 2% more than FDs, and hence they are a good option to park your liquid funds. If you have surplus funds that you require after 3-4 months, you can park the funds in liquid funds, save yourself from the impact of increasing interest rates, and earn guaranteed returns which are more than FDs.

Learn about: Different types of mutual funds