A study conducted by Crisil FundServices has found that liquid funds not only offer higher post-tax returns but also provide a reasonable degree of safety in terms of the principal invested.

Liquid funds invest in short-term debt instruments with a maximum maturity of 91 days. They can be redeemed within 24 hours and have no exit load, Crisil said.

“Beyond returns, liquid funds also have advantages in terms of liquidity, safety and portability,” Crisil Research Senior Director Mukesh Agarwal said.

Over the last 5 years, liquid funds rated by CRISIL have given an annualised post-tax return of 5.78 per cent, compared to 3 per cent given by a savings bank account.

“Liquid funds are not totally risk-free and an investor must carry out basic checks before investing. Factors such as the fund house and the scheme vintage, consistent performance over a longer period and comparison of the scheme with appropriate benchmarks can be looked at for selecting the right fund,” Crisil Research Director (Capital Markets) Tarun Bhatia said.

The study said that a majority of Indians continue to park a large amount of funds in savings bank accounts. As of March 31, 2010, money in such accounts in scheduled commercial banks stood at Rs 11.36 lakh crore.

Within liquid funds the dividend option is more tax- efficient, which is more suitable for investors, who fall within the 20-30 per cent tax brackets.

Post tax deduction, liquid funds yield better returns vis-à-vis savings accounts and fixed deposits, wherein the interest earned would be taxed based on an individual’s tax slab, Crisil said.