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Stock Market Crash 2k20 has prompted the investors to pull out their money from the stock market. A smart investor is the one who invests near the bottom of the market and pulls out from near the top of the market. The biggest concern of an investor is where to park the money for the short term.
The most common options available for the investor are fixed deposits or the liquid mutual funds. In terms of returns, the interest rate of the fixed deposits is fixed for the duration or the term of the fixed deposits. Currently, the interest rates are very low i.e. less than 6%. The savings account interest rate of the biggest PSU is just 3% which is much less than the rate of inflation. Whereas in liquid mutual funds, the returns are approx 7.2% over the long term. It is more than double of savings account interest rate.
The risk of fixed deposits is very less. Recently, the deposit insurance coverage is increased to 5 lakh from 2 lakh. Whereas liquid mutual funds do not invest in the stock market or equity. Therefore, they are relatively safe.
There is no lock-in period in liquid mutual funds and you can redeem the mutual fund units without any penalty, unlike fixed deposits where there is the penalty for premature withdrawal.
Liquid mutual funds are tax-friendly as the capital gain tax is applicable based on the holding period. The investor can take advantage of the long term capital tax if the holding period is more than 3 years. In such cases, the tax rate is 20% post indexation.
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