What do we do with the surplus of income over expenses i.e our savings. We keep some money for meeting our near term emergencies or commitments like paying our kids' school fee, a weekend getaway, a family function, etc. and we invest the rest. In this article we will focus on the former viz the money we keep with ourselves. Most people keep this money as hard cash in their homes or deposit the money in their savings bank account. In the financial world, it is practically a sin to keep cash at home, because of two reasons. 1. It is risky, can be lost or stolen and 2. It is not giving any return. Those people who are keeping this money in savings account do offer protection to their money but the return that you get is negligible.

Your money should at least cover the rate of inflation, because Rs. 1 Lac today will not be of as much value a year later. So, if you are looking for safety and similar convenience of withdrawal of your cash but with better returns, then Liquid Funds is your best bet.

What is a Liquid Fund?

A Liquid fund is a category of debt mutual funds, which invests in short term debt securities like certificate of deposits, treasury bills, commercial papers, term deposits, etc. having maturity of up to 91 days.

So if you want to park your extra cash and you need the money soon, say in a week or a month or few months , you don't have to adjust with the low returns offered by your savings bank account, you can stash the cash in Liquid Funds. You can invest in a liquid fund even for one day.

Savings account balances are huge in case of salaried people whose money keep on accumulating with every salary in their saving accounts.

Let's take an example of Mr. Ram, who is working in Infosys. Mr Ram gets a salary of Rs 100,000 per month and he is saving Rs 40,000 to Rs. 60,000 a month, which is getting accumulated in his saving account. For simplicity sake, lets assume

1. Mr. Ram is saving Rs 50,000 fixed in each month.
2. Mr. Ram withdraws Rs 50,000 on the first day of each month and his saving remains in his account for the entire month.
3. Semi – Annual Compounding, and we are considering a time period of 6 months, therefore compounding effect is ignored.

At the end of 6 months:

Value of Mr Ram's money in Savings Account @ 4% interest p.a. = Rs. 303,456

If Mr. Ram moves his savings in a Liquid Fund on the first day of each month

Value of Mr Ram's money in Liquid Fund @ 8% interest p.a. = Rs. 306,829

Just by moving his money from his saving account to a liquid fund, Mr Ram earns Rs 3,372 extra on the same investment.

Why should you invest in a liquid fund?

1. You can easily park your money for short intervals.
2. Money kept at home or in savings account is not growing, the returns are lower than the inflation rate in our country. Liquid funds offer higher returns, so that your money is able to catch up with and outperform inflation.
3. You can withdraw your investment anytime, without accruing any penalty.
4. Since Liquid Funds invest in fixed income securities with short maturities, hence they bear a lower risk.
5. No entry and exit loads, hence Liquid Funds are cost efficient for the investor.
6. If you do not withdraw your money from Liquid fund for over 3 years, you get the benefit of paying tax @ 20% with indexation. Short term returns are taxed as your saving bank returns.

Now you can earn extra income by moving your money from your cupboards, savings or current accounts into liquid funds. You get better returns and you can withdraw whenever you need.

India is in a state of Euphoria, celebrations are in the air with one festival lined up after the other, and we just wrapped up the biggest of all, Diwali. For many of you, your bosses/companies have made the festival of lights even more brighter, with the Diwali bonus. We have been looking forward to the festivities as well as the big money coming in, and the topic for today is the latter, the Bonus.

Generally, we are conservative in spending our monthly salaries, but when it comes to sudden inflow of money, we become liberal. We plan things around this jackpot, we treat our friends and family with a grand bonus party, followed by owning our desires, the new DSLR, the latest I-phone, diamond ring, Goa vacation, etc. So, soon after the bonus money lands into our accounts, it's blown in the air, most times serving no constructive purpose. So, it's this general approach towards bonuses, that prompts us to write this piece.

One central characteristic of money is its fungibility, the value of Rs 1 lac remains the same, irrespective of the source. So, whether Rs 2,000 is from your salary, or whether you found the note on the road, both carry same value, and can get you stuff of equal value. Taking the fungible nature of money at the core and also the fact that bonus is a big amount which you don't get routinely, we are sharing some tips which can help you make the most of your bonus.

1. Repay your Debt: The heaviest burden you can carry on your shoulders is the debt burden. Since you do not get a bounty in addition to your monthly salary every month, you should put this to good use, you can use it to significantly cut your debts. Begin with credit card bills and personal loans, since these carry massive interest rates, so a lot of your money is wiped away every month in interest payments. You can even consider offloading some of your other commitments, like home loan, car loan, etc. So, use the bonus wisely, throw the debt off, so that you can walk free.

2. Create or Contribute to your Emergency Fund: We need at least 6-8 months of our income handy at all times, to protect our shell during financial distress. There can be periods of less income or even no income, like in case of job loss, job switch, emergencies not covered under insurance, etc. You need money to survive, provide for the basic necessities in such situations, which calls for the need to have an adequate emergency fund. In case you don't have an emergency fund or it is inadequate, you must use the bonus in this direction.

3. Invest for your goals: According to Hindu mythology, Diwali time is a good mahurat, people try their luck in cards, lotteries, casinos, hoping to make big gains. But you must remember that luck is two-faced, sometimes it's on your side, sometimes not, hence you should stick to fundamentals and focus on long term wealth creation. Invest your Diwali bonus in your future, since the bonus is a big amount, it will be a big leap towards your goals.

4. Pursue your Passions: The football club you always wanted to join, the horticulture course you want to do, the music class you have been postponing, or a professional course you want to do which is going to accentuate your profile and help you grow in your career. This bonus is an opportunity to invest in yourself, which is otherwise difficult to manage from the routine income.

5. Don't let the bonus sit in your Saving Account: Some of us might have planned about how we are going to spend the bonus, while others are yet to decide the outlay. So, for those of you who have the bonus lying in their saving account with no intended immediate use, it is advisable that you shift it into a Liquid Fund. It will serve the dual purpose of yielding better returns for you than the saving account, plus it will protect the money from you, for you might end up ravaging a part of your bonus by casually swiping your debit card.

To conclude, The Diwali bonus is no lottery, it's the reward for the hard work that you have put for an entire year. Don't splurge it, rather employ it in a way so that it is able to make a difference. The above were few avenues which you can allocate your Diwali bonus to, as your contribution towards a brighter future.

Equity markets in India have remained volatile for quite some time now, some sectors have demonstrated a poor show than others. Further because of SEBI's regulations to restructure mutual fund schemes, to increase the % allocation of large cap schemes in the portfolios, a lot of churning has happened in MF portfolios to effectuate the re-categorization, and the impact is reflected on equity MF schemes and SIP returns too.

The anxiety among MF investors is understandable, since the returns from SIP investments are dropping, the SIP's started in the last one year are in the negative. The new investors who just gave mutual funds a try, are disheartened because of the losses, since they haven't seen the upheavals before. Amidst the grey scenario, a lot of you must be wondering if you should continue your SIPs, should you stop the SIP for some time or may be redeem the investment to cut further losses?

To solve this dilemma, let's first look at the SIP returns from the average of Diversified Equity Mutual Fund Schemes.

As of 30^th Sep 2018; Source NJ Internal

The above are the average return numbers for SIP in diversified equity schemes. As we see, over the past one year SIP in diversified equity schemes has yielded a little less than 11% loss for the investors. While this is the average, the numbers for some funds are even worse, translating to investors making massive losses in these 12 months. The ones who invested 6 or 8 months back are probably the worst hit. But as you move further to 2 years, 5 years and upto 10 year periods, returns are regaining, the numbers have become positive and have gradually risen upto a little less than the 15% mark for 7 and 10 year periods, after making up for the last one year's fall as well as for the past volatile periods that came in between.

The investors who invested in the past one year are the ones who suffered losses, while their mature counterparts have created wealth over the years. But the point to take note of here is, this latter mature set too has made money after facing the short term volatile periods like you are facing now, but they did not stop their SIP's, rather they held on to their investments to witness the growth and create wealth for themselves.

To further untangle your dilemma, let's understand how does an SIP work?

The strength of the SIP mode of investing lies in Rupee Cost Averaging. Each SIP installment of yours fetches you different number of units of the scheme, based on the prevailing NAV. So, when the NAV is low, you get more units of the scheme and when the NAV is high, you get less units of the scheme. This means SIP encaptures the market lows to get the best for the investor, by adding more units to his vault. This is also the answer to your question. If you discontinue or redeem your SIP now, when the market is low, which is an opportunity to buy more units for the same price, the sole purpose of investing through the SIP mode gets defeated. So, you should rather be doing the opposite. Instead of discontinuing your SIP, you should invest more, to get the maximum out of the low prices.

So, to conclude, a slump in the market is not a valid reason to stop the SIP, rather it's an opportunity to invest more, the creases will be ironed out eventually. The best and the easiest thing to do in the current scenario is stay focused, and continue investing. Discipline is the key here, ignore the market noise and stick to your investment objective, which is far far away. As the power of compounding plays the magic, SIP returns over long periods of time can create massive wealth for the investors.

Liquidity is a familiar tune that you would often come across. It is one of the most critical aspects and is behind most financial problems that people land into. Concurrently, it is also one of the most understated elements considered while investing, our focus is usually limited to the returns offered.

So, to begin with, let's understand what exactly is Liquidity.

Liquidity is the ease with which you can redeem your investment and get the proceeds in your bank account, the sooner it takes to reach in your hands, the more liquid it is.

On these lines, Cash and Real Estate can be considered as the two extremes of Liquidity, Cash being the most liquid and Real Estate on the other extreme end of the liquidity line, especially if it is a heavyweight property, that is a lot of value is attached to it.

However, there is a little deviation to the definition of liquidity. Along with the ease, an asset is considered liquid if the price of the investment isn't affected because of the sale.

In case of stocks and equity mutual funds, although you can redeem the investment and have your money fairly easily, yet stocks aren't considered as liquid assets, because of the volatility associated with them. Investment in equity with a short horizon can be risky because markets are volatile, the investment can even fall below the purchase price soon after investing, and you might even end up losing money.

Why do you need Liquidity?

Quite often we see, that a lot of people have most of their money stacked up in assets, which are illiquid and are ideal for long term investing, leaving them with negligible cash or liquid assets.

You must have heard about cases when properties are available at mouthwatering rates if the payment is made in cash or within a very short period of time. Investors redeem their fixed deposits prematurely, and pay heavy penalties on such withdrawals. Some sell their shares or Mutual Fund investments, which they had kept for their retirement, and the proceeds are lower than their investment value.

What leads these people land into such mess?

The answer is lack of Liquidity. These investors sell their investments at below market prices, to meet their urgent money needs like medical emergencies, job loss, etc.

You would not want to land into such a situation. Would You?

The solution to manage the mess is maintaining enough liquidity at all times. However maintaining Liquidity doesn't mean that you don't buy a home or invest in Mutual Funds or other Illiquid assets. You need these assets for your long term goals. Equity for instance has great return potential if you hold the investment for a long period of time.

The point is, you must ensure that you don't need to sell your long term investments for your short term money needs. You must have provided for resources to take care of the latter, this will enable you to hold on to the investment until the opportune moment when the asset has appreciated over time.

You need a mix of both, but you must provide for liquidity first So, before you invest in Equity or other Illiquid assets, having enough liquid assets is paramount, ensure that:

• You have created an adequate Emergency Fund. The Emergency fund should be such that it is quickly convertible into cash. And it must be enough to provide for at least 6 months to one year of your family's living expenses, so in case of loss of income, job loss, etc., you can survive without having to break your long term investments.
• You have yourself and your family covered with adequate insurances. Medical and hospitalization expenses in case an accident or a critical disease, can be huge and beyond the scope of your Emergency Fund, so you need adequate insurances, life and health, to ensure your long term investments are not compromised for such emergencies.
• Keep some money handy for one off expenses like washing machine repair or replacement, car service and repair charges, family weddings, etc. You can park surplus cash in liquid funds or short term debt funds also, to get a better return than saving accounts and at the same time these investments are liquid enough.

While making an investment decision, pay heed to the liquidity aspect of the product. Match your need with the liquidity offered. In some traditional investments, liquidity is very low, like a PPF or traditional endowment policies. You have to wait for decades to get your money back. Also note the process for cashing out, especially if the money is being kept for liquid needs like emergencies.

To conclude, returns can take you ahead in the long run, but make sure you have the necessary liquidity in place to savour those returns. Let not an emergency teach you a lesson. While you are evaluating investments, Liquidity plays a pivotal role and must be considered, along with Risk and Return.