Liquid funds are the best tool to put your idle cash to use.
We never use the term “increase in productivity” in our general terminology of personal finance. This is something related to business houses, small or big doesn’t matter.
But I believe that to get the most out of our personal finances, we should manage it the way corporates do. Making and following budgets, maintaining books of accounts, keeping a record of all expenses and incomes, doing a quarterly review and keeping a check on profitability, utilizing all resources to the optimum level etc.
Personal financial planning is just the personalized version of corporate financial management. This article is about using of liquid funds to increase the productivity of idle cash. It is as important for personal finance as it is for businesses.
When we are looking for ways to increase the productivity in any business, the first thing to figure out is the idle areas of production. And among all factors, capital is the most important as it helps in buying and managing the others like land, labor Raw material etc.
Now you can very well assume the fate of that business, where the most important factor i.e. Cash is lying idle. Cash means Capital, which when used in day-to-day work is called as working capital and when for the purchase of plant and machinery or land etc. called as fixed capital.
It can be sourced through equity route by putting in own money or can be taken through debt route as in the shape of a loan from banks etc. In whatever form it is, there should be the optimum use of this which will help in increasing productivity of the overall business.
How to use Liquid funds in Personal Finance?
1. Look Beyond bank deposits:
Generally, business owners park their cash in the bank current accounts. They don’t invest it anywhere thinking that the need to use cash might arise anytime. Some banks offer fixed deposit linked current accounts where the excess cash gets transferred to fixed deposit thereby offering better returns to the account holder.
But banks have a slab rate structure where the returns can be lower for shorter periods as compared to a longer tenure.
The best alternative to these deposits is liquid funds which can be used to park the surplus funds lying in current account or even the money meant for fixed deposit.
These funds have different variants which can be used as per the suitability of time frame. You may use these for tenures ranging from a weekend to a year.
This applies to personal finances also, where we say to keep the only emergency fund in saving account and all excess cash should be invested properly as per the goals. Even for emergency fund parking these funds like liquid funds/ultra short term funds can be used. (Read: Emergency fund investment options)
Top Liquid funds of 2017
Source FE Analytics. Data as on 09 Dec’2017
2. Cash management Strategies:
When you are clear on the time frame on usage of funds, you may design your cash management strategies accordingly and use mutual funds like Interval funds, short term plans, fixed maturity plans to your advantage. These all are the other different funds come under debt mutual fund category
In these plans you get the potential to earn more than bank deposits and also save considerably on tax payments. As in debt funds you don’t earn interest but capital gains and long term capital gain with holding period of more than 3 years is taxed 20% with indexation.
3. Use the technology:
When you understand the working of liquid funds and start using it fully to your advantage, you may find difficulty in doing your business transactions since all of your those transactions has to be routed through bank.
It becomes difficult to track bank accounts for surplus funds and also at times it’s cumbersome to do Mutual funds transactions when you are in urgent need of funds. All this and many more such kind of issues can easily be sorted out if you use technology to the full.
You may opt for online facility from MF houses to invest and redeem the funds, Use RTGS/NEFT from bank to get the same day NAV, There are many fund houses where you can purchase and redeem the units through SMS. You also may opt for the systematic withdrawal or transfer facility for your day to day requirement of cash.
Conclusion: Should you invest in Liquid funds?
Many individual investors or small business personas are of the view that it involves unnecessary hardships and liquid funds are not meant for small investors. But they don’t understand is BIG THINGS HAVE SMALL BEGINNINGS.
When you are serious to increase productivity, you may have to learn new things. There are many ways to do that but ultimate effort has to come from your side. And I believe me it’s worth taking the effort.
Whatever extra liquid mutual funds generate for you will support your expenses in some way or other. So make the most of it and use debt mutual funds to its full potential and increase the productivity of idle cash.