Liquid Funds, good short term investment?

I have been thinking about the usefulness of Liquid Funds, ever since I heard about them last year (that is when I started paying attention to financial planning and investment) and to me they seemed like a nice way to make a few extra bucks in short term, without risking the capital and still being able to maintain better liquidity than in case of short term fixed deposits.

For those who do not know, Liquid Funds are short term investment options and invest majority of their holdings in debt instruments and are supposed to be easier and faster to offload than traditional Mutual Funds and Fixed Deposits.

They really come in to play when you have money surplus for a short while eg. you are planning to buy a high priced item or have to make an investment/payment month or two down the line and will have that money sitting in your bank account, earning nominal daily interest (which can be quite decent in case of a few banks).

While one cannot risk the capital (since it is meant for a certain purpose), there is nothing wrong in earning a little extra interest, especially since it can add up to a decent amount over time, especially if the cash surplus is significant enough.

Additionally, as far as I have read (don’t take my word for it and consult with your CA before making any decision), if one choses dividend option, then one only has to pay dividend distribution tax, which based on your income tax bracket, might end up being less than what you would pay as income tax. Making Liquid Funds tax efficient, when compared to saving bank interest and fixed deposits.

With most top of the line Liquid Funds returning a handsome 0.7 to 0.8% interest a month (8.4% to 9.6% annual interest) right now, they can end up earning more than twice the interest you will earn in your saving bank account.

Which may not seem much in case of small amounts, but when invested regularly (especially if the amount is significant and regular) it can end up making a difference to your bottom lines.

So I thought about giving it a shot with a modest 15k surplus I have at the moment and have gone ahead and invested the same in SBI’s Magnum Insta Cash Fund Liquid Floater Plan with an investment horizon of around 30 days.

While I wouldn’t make enough extra interest (over the saving bank account interest) to even buy a 2 liter bottle of coke, I really do wanted to give it a shot and observe how it actually performs at the end of the day, and whether or not I can actually make it a part of my regular investment strategy in future (because let’s face it, there is a world of a difference between what one reads and experience one gains by actually going ahead and doing something).

So this going to be my Financial Experiment for the next 30 days and I will report back with my findings and experience, once the 30 days are over and my money is safely back in my account.

Update: My experiment is over and here are the results, Investing in Liquid Funds, my experience