Time for investment in Liquid fund  has arrived ! Media report suggest that Short-term interest rates rose during last week, as banks push loan growth to shore up their balance sheets and meet half-yearly targets. In such case , on of the best method to earn income from surplus funds you have in your savings account, is to invest in Liquid or liquid Plus funds . 
Earning Potential : Liquid Fund vs Savings Account
While the surplus funds , say you keep always Rs 1, lakh in saving account , earns mere average interest of 3 –4 % , where as in liquid funds return can be on average 8 %.
Liquid Fund almost as Risk free as a Savings Account
The liquid fund can not deploy fund in equity which is riskier. The SEBI regulate these funds . The Liquid funds invest with minimal risk and their portfolio usually consists of short term deposits, short term .government securities, Money Market Instruments
Almost as liquid as savings account
Like the saving account, the liquidity of liquid plan is very easy. If you order redemption by 1 PM today, you will get money next day in your bank account. So, you can always park the money there and use it is almost as savings account.
Lower tax on liquid fund than saving accounts or FD
Dividend is tax free in hands of recipients. However, there is Dividend Distribution Tax which is charged on Dividend given to an investor. Therefore, it requires comparison with tax implication on other investments .In case of savings account and fixed deposits , the normal tax rates are applicable in case of individuals. Therefore, a person , in 30.9 % tax bracket , shall pay 30.9 % tax on earnings as interest from savings or Fixed Deposits account, whereas in case of liquid fund, the tax rate is 25 % plus education cess @ 3 %. which comes to effectively 25.75%.
Top 10 Performing Liquid Funds
| Liquid Schemes | 1 mth | 3 mth | 6 mth | 1 yr? | NAV |
| Birla Sun Life Enhanced Arbitrage Fund – Growth | 0.53 | 2.27 | 4.58 | 9.21 | 11.32 |
| Tata Treasury Manager Fund – SHIP – Growth | 0.78 | 2.27 | 4.56 | 8.72 | 1169.03 |
| Birla Sun Life Cash Manager – Institutional Plan – Growth | 0.80 | 2.30 | 4.63 | 8.66 | 17.18 |
| Sahara Liquid Fund – Variable Pricing Option – Growth | 0.69 | 2.23 | 4.63 | 8.66 | 1874.86 |
| ICICI Prudential Flexible Income Plan – Premium – Growth | 0.76 | 2.27 | 4.60 | 8.63 | 191.11 |
| ICICI Prudential Floating Rate Fund – Plan D – Growth | 0.75 | 2.25 | 4.56 | 8.62 | 152.02 |
| Sahara Liquid Fund – Fixed Pricing Option – Growth | 0.69 | 2.23 | 4.59 | 8.61 | 1859.40 |
| Reliance Money Manager Fund – Inst – Growth | 0.75 | 2.25 | 4.62 | 8.61 | 1399.25 |
| Tata Treasury Manager Fund – HIP – Growth | 0.76 | 2.22 | 4.52 | 8.58 | 1361.16 |
| Reliance Medium Term Fund – Growth | 0.75 | 2.26 | 4.76 | 8.52 | 21.27 |
In author’s opinion……….person should park surplus funds from savings account in liquid fund rather than Fixed Deposits if it wants to use the fund within six months.
If mutual funds use most of the capital gains and dividends of their portfolios to make distributions to investors, why does the fund’s net asset value (NAV) increase over time? It seems that distributing these gains would cause the NAV to remain steady, or to decrease.