Most of us do have one or more savings bank account or a salary account in which our salary gets credited every month. After all of our monthly expenses like house rent, bills, EMIs etc, we are left with liquid money (disposable) also famous as Monthly Savings. Some of us invest in equity mutual funds, FDs or share market. Most of the people due to their ignorance or laziness, leave the money accumulating in their accounts every month.

They are also unaware that the bank give them only 3.5 to 6% rate of interest, Also even this small money earned is taxable up to even 30 per cent. Keeping in mind the inflation rate, this gives you negative return on your hard earned money.

Some better financially educated people, put their money in FDs. But that too have some disadvantages. One, fixed deposit are not very liquid. The investor cannot withdraw his money during the term of his deposit. In case he wants to make pre-mature withdrawal he has to pay a penalty.  Secondly, investor has to pay income tax upto 30% on the return.

Some invest into Share markets or equity mutual funds, But considering the current market situation, its not advisable to do that.

So now question is where we should keep our hard earned money ??

There is a great option to put your money into and have liquidity as well as earn good returns too also. Best choice is a liquid mutual fund.
Liquid mutual funds are open ended debt mutual funds. There is zero entry or exit load. They are safe options as they are not invested into equity or markets. These are best place to invest for short periods of time (even for 1-2 days). Also they give better returns than FDs and savings bank account.

Whenever, you need money back, just redeem the funds and amount will be back in your account in max 2 business days.

How much income tax one need to pay on returns from liquid mutual fund: In case of a liquid fund with dividend option, dividends declared by mutual funds units are exempt from tax in the hands of recipients. Dividend distribution tax of 22.06% is paid by the fund and is adjusted in the net asset value (NAV) of fund.

Best performing Liquid mutual funds:

LIC Liquid Fund
HDFC Liquid Fund
Birla Sunlife Cash Plus
Magnum Insta Cash Fund
HDFC Cash Management Fund

There are two types of these short terms debt funds available, Liquid and Liquid Plus. Now question come to mind, how they differ and when to invest in which one.

Liquid plus funds holds investments for a longer period than liquid funds. So people investing in liquid plus should hold for longer duration than liquid ones. Investors who need liquidity should go for liquid funds. Some of the liquid plus funds may have an exit load. But there is no entry load on liquid funds.

Liquid Plus funds are a bit riskier than liquid funds as they hold investments for a longer duration and also there is no limit on market-to-market components but liquid funds have 10% limit on it. A dividend distribution tax of 28.33% is charged on liquid funds, whereas 14.16% is charged for liquid plus funds.

So next time, your salary comes to your account, Just keep your monthly expenses and transfer rest of the amount into the liquid mutual funds.