Idle way to wealth

If you are looking to park your money for the very short-term, there's still a way out. With the government hiking the dividend distribution tax in the last budget from 14.025 per cent to 28.325 per cent for retail and 22.44 per cent for corporate investors, liquid funds lost much of their sheen. But now liquid funds are being launched in a new avatar: the liquid plus category.

A sebi circular defines liquid fund schemes in which the mark-to-market component of the fund, on a weekly average basis, is less than 10 per cent. But the new categories of liquid funds increased the mark-to-market component to more than 10 per cent to continue attracting the benefits of a lower dividend distribution tax. Liquid funds used to hold debt instruments with an average maturity of around two-to-three months. However, new liquid funds have papers with maturities of around five-to-six months. But this added maturity is not compromising with the liquid nature of the schemes or the approximate expected returns.

However, these new liquid schemes have a lock-in period typically ranging for a week, unlike the typical liquid funds that allowed withdrawals within a day. Withdrawals before this lock-in period will attract a small exit load. This category makes an attractive alternative to the bank deposit. A typical liquid fund can provide returns of around 7.5-8 per cent per annum pre-tax as against 3.5 per cent from a savings bank account. The lower dividend distribution tax here, however, will result in a better post-tax yield as compared to a normal liquid fund. While the names differ between fund houses, retail investors who don't have immediate fund requirements can benefit from them.

A safe heaven 
» The liquid fund plus category has a better post-tax yield as compared to a normal liquid fund
» New liquid plus funds have a higher maturity but the returns are likely to be similar to regular liquid funds
» These funds have a lock-in of typically one week; premature withdrawals attract a small exit load
» Ideal for a retail investor who does not require the funds as they provide better returns than bank deposits