Using credit cards + liquid funds: Can this smart strategy boost your savings returns?

I’ve been doing SIPs directly from my bank, but my senior uses credit cards for expenses and parks his salary in a liquid fund to earn extra returns. Is this a good strategy for saving and earning more? How quick is liquid fund withdrawal, and are there tax implications I should watch for if I adopt this approach?

Advice by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance

A growing number of salaried individuals are adopting smarter cash flow strategies to make their money work harder. One such approach involves using a credit card for monthly expenses while parking the salary in a liquid mutual fund to earn additional returns. The logic is simple: credit cards typically offer an interest-free grace period of 30 to 45 days. Instead of letting money sit idle in a savings account during this period, it can be temporarily invested in a liquid fund, which generally offers returns in the range of 5–6% per annum, significantly higher than most savings accounts.

Liquid funds invest in very short-term debt instruments such as treasury bills and commercial papers, making them relatively low-risk and highly liquid. Most liquid funds follow a T+1 settlement cycle, meaning the redemption proceeds are credited to your bank account on the next working day. Additionally, many fund houses now offer instant redemption features – typically up to ₹50,000 per day or 90% of the invested amount – where funds are transferred within minutes, providing an additional level of flexibility for users.

However, this strategy demands financial discipline. The key requirement is to ensure that the credit card bill is paid in full before the due date to avoid hefty interest charges, which can range between 30–45% per annum and quickly erode any gains made from liquid fund investments. It’s also important to consider the tax implications. As per the tax rules effective from April 2023, gains from liquid funds are taxed at the individual’s slab rate, irrespective of the holding period. Earlier, investors could benefit from indexation if held for more than three years, but that benefit no longer applies.

There may also be nominal exit loads if the investment is redeemed within seven days, but these are generally negligible. For example, redeeming on Day 1 might incur a 0.0070% charge, gradually reducing each day thereafter. While liquid funds are relatively low-risk, they are still subject to minor interest rate or credit risks and are not entirely capital-guaranteed like fixed deposits.

For financially disciplined individuals, especially those who already use credit cards responsibly, this strategy can help optimize monthly cash flow while earning a modest yet meaningful return on idle funds. Starting small and understanding the operational details of the fund and the redemption timeline is advisable. With the right setup and self-control, this method can be a smart, tax-aware way to boost short-term returns without significantly increasing risk.

Beyond higher returns, using liquid funds strategically allows investors to maintain liquidity while earning modest income. However, experts stress that discipline is crucial. Missing a credit card payment can wipe out gains, as interest charges range from 30% to 45% annually.

Additionally, post-April 2023 tax changes mean liquid fund gains are taxed as per individual income slabs, eliminating previous long-term benefits. Investors should also factor in minor exit loads on very short-term withdrawals, though these are minimal.

Despite modest risks, the expert noted this approach suits those confident in managing credit responsibly. Done right, it turns idle cash into an opportunity for extra earnings.