We often tout mutual funds as a great investment product, given its capability to generate high returns with relative safety. But, the use of mutual funds goes beyond investments. For instance, investors can also use mutual fund to efficiently manage their cash flow requirements.
Most individuals keep a significant amount of money in savings accounts to meet their short-term needs. Even people with fixed monthly income maintain a certain balance in their bank accounts for emergency requirements. But, however convenient this practice may seem, it is not financially prudent. With a little bit of planning and with the right mutual fund products, investors can squeeze out higher returns from the same money.
MFDs say investors should prefer liquid, overnight and even money market funds over savings account for short term cash requirements as they have the potential to deliver slightly better returns. “The advantage of these schemes is that they pay interest for each day that the money is invested,” said Mumbai MFD Sadashiv Phene. Savings account take into consideration the balance on specific dates to calculate interest.
The difference in returns become wider when the repo rate is on the higher side. This is because debt fund returns automatically reflect the prevalent rates as against savings account returns, which generally stick to a fixed rate.
When to opt for which fund?
Liquid and overnight funds are suitable for cash flow management as they come with instant withdrawal facility. Some mutual funds even provide ATM cards to allow quick withdrawal.
Investors can also opt for money market funds. They offer higher returns compared to liquid and overnight funds but redemptions aren’t that quick.
The choice between these funds should depend on expected investment horizon and the risk appetite. While overnight funds are said to be completely risk free, liquid and money market funds can carry credit risk.
“If someone has a time horizon of 1-3 months, he can venture into liquid funds but again one needs to keep in mind that liquid funds can invest in low credit. There is no rule saying liquid funds cannot venture into low credit. Investors should select the fund carefully,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.
Also, you should keep in mind that liquid funds have exit load in the first seven days. Overnight funds are a better option for very short term investments as they do not have any exit load.
Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund
For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge centre section available on the website of Mirae Asset Mutual Fund
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
