Smart Deposit is like a special savings option from a bank. It lets you save money and be flexible with it. You can start with just a small amount, like Rs. 1,000, and add a bit each month if you want. It’s a convenient way to save and still have some control over your money.
Smart deposits are considered to be a better alternative to the deposits offered by banks. They are said to be a good option that will help you achieve your short-term goals.
Here’s everything you need to know about them, including how they work, how much taxes you have to pay on them, and how you can choose the right fund for yourself.
What Are Smart Deposits, Anyway?
Smart deposits are liquid funds, which invest in extremely short-term fixed instruments with a maturity period of 91 days. The instruments they invest in include Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD), and Collateralized Lending & Borrowing Obligations (CBLO).
Fund managers invest in these instruments to generate optimal returns while maintaining safety and high liquidity.
When it comes to liquid funds, the aim of the fund manager is to invest only in those liquid instruments, which have a good credit rating and carry a very low possibility of a default. With liquid funds, the main objective is to provide protection for your money.
Hence, Smart Deposits are considered to be a great alternative to bank savings accounts and fixed deposits. With Smart Deposits, you earn higher returns than a bank savings account, making it a good option to park your idle money.
Typically, liquid funds do not charge any exit loads.
Investors are offered growth and dividend options. Within the dividend option, investors can choose daily, weekly or monthly dividends depending on their investment horizon and investment amount.
How Do Smart Deposits Work?
The main source of earnings for a liquid fund is via the interest income on its debt holdings and a very smart portion of its earnings may be generated through capital gains.
This means that when interest rates decline, bond prices go up and when interest rates rise, the bond prices fall.
As liquid funds mostly invest in short-term securities, their market value does change as much when interest rates fluctuate. Hence, liquid funds may not incur sharp capital gains or losses.
The one thing that you need to keep in mind is that liquid funds are not completely risk-free.
Since liquid funds invest mostly in debt instruments, they carry interest rate risk. Any change in the prevailing interest may cause a rise or fall in the price of the debt instrument, thus affecting the returns of the fund, which differ on a daily basis.
Debt instruments also carry credit risk. But the good news is that credit risk can be significantly reduced via conservative investment policies like investing in sovereign securities and high-grade credit instruments.
Investing & Redeeming – Liquid Funds
When you invest money in smart deposits (i.e.) liquid funds before 2 PM of a trading day, the amount will be processed as per the previous day’s net asset value (NAV), as long as the funds are credited to the asset management company’s (AMC) collection account before 2 PM and the application reaches the AMC’s branch before time.
So, if a purchase transaction in a liquid fund is submitted on a particular day, the applicable NAV is of the day prior.
If you wish to redeem your funds, the redemption is credited to your account on the next working day. For instance, redemptions received on Friday before 3 PM will be processed on Sunday’s NAV and the payout happens on Monday.
The Taxes We Pay
If you are investing in the growth plan of a liquid fund and if you redeem your investment before three years, you would have to pay short-term capital gains (STCG) tax, which will be taxed at the income tax slab rates.
This means, the gains will be added to your income and taxed at the income tax slab rate that you will be falling under.
If you redeem your investments in liquid funds after three years (36 months), you will be subject to long-term capital gain tax (LTCG), which includes indexation benefits, and is taxed at the rate of 20%.
Who Is It For?
Liquid funds are suitable for you if you receive a large sum of money and looking for a safe investment instrument to put it.
Liquid funds are an ideal option to park money for a short time and you can redeem them anywhere and at any time.
Liquid mutual funds are also ideal if you wish to invest a big amount for long-term investing.
Then, you can choose to invest systematically or periodically via a systematic transfer plan (STP) into another asset class like equity.
You can also create an income stream by investing a big amount into a liquid fund and you can use the systematic withdrawal feature to receive a monthly pension.
Choosing The Right Fund In Smart Deposits
When you are choosing a liquid fund, it is important to invest in one, which has a lower expense ratio.
You should also check the investment portfolio of the fund to make sure the fund has invested in highly rated instruments.
Also, try choosing a fund that has a long-term track record and doesn’t have any past instances of credit events or any other issues with respect to liquidity in the fund.
In The End…
Smart deposits are a great option that offers protection against volatility, as well as steady returns.
So, your data is safe with us and you can start investing in smart deposits in just a few clicks. Create an account with us today and experience the new-age investing experience with us!