I have been keeping money in bank recurring deposits (RDs) for my short-term goals. Are liquid funds a good option for such goals?
—Chetan Singh
Liquid funds are a good option to park your surplus money temporarily instead of allowing them to lie in your savings bank account as they typically deliver higher returns than the saving bank interest rate. If you wish to have liquidity (that is, easy access to your money) then it is a good option. However, liquid fund returns too can decline with lower interest rates. Hence, they may not always deliver high returns. If you want a substitute for an RD with a two-year perspective, you can consider short-term debt funds such as UTI Short Term fund. You can check Mint’s curated list of 50 mutual fund schemes and choose liquid funds to invest in (http://bit.ly/1TGY5e4 ). These funds are likely to deliver higher returns than RDs and you can always take your money out whenever you need, as there is no lock-in.
Also, if you hold short-term debt funds for over three years, it will be more tax efficient as they will have the benefit of capital gain indexation.