Liquid Mutual Funds
Liquid mutual funds are an attractive choice for those who are seeking a safe and flexible way to park their surplus cash for short durations. These funds invest in short-term debt instruments like treasury bills and government securities, offering high liquidity, low risk, and better returns than traditional savings accounts. With no lock-in period and easy access to your money, liquid mutual funds are ideal for managing emergency funds or meeting short-term financial goals.
What is Liquid Fund?
A liquid mutual fund invests in short-term assets and fixed-income securities like treasury bills, government securities, and call money. These funds are designed to provide investors with a safe, highly liquid, and low-risk option for parking surplus cash. They typically offer better returns than a savings account, with a short investment horizon of up to 91 days. Due to their liquidity, investors can withdraw funds quickly, usually within 24 hours, making them ideal for emergency funds or temporary investments.
Features of Liquid Mutual Funds
- Short-term Investment: Liquid mutual funds invest in assets with maturities of up to 91 days, minimising interest rate risk.
- High Liquidity: Investors can redeem their units on any business day, with funds typically credited within a day.
- Low Risk: These funds carry minimal credit risk as they invest in high-quality debt instruments, offering stability.
- Better Returns than Savings Accounts: Liquid funds often provide higher returns compared to savings accounts, though the returns are not guaranteed.
- No Lock-in Period: Investors can enter or exit these funds anytime without penalties, offering full flexibility.
List of Liquid Mutual Fund Schemes
How Does Liquid Mutual Fund Work?
Liquid mutual funds pool money from multiple investors and allocate the funds to high-quality, short-term debt instruments like treasury bills, commercial papers, and certificates of deposit. The fund manager is the one who actively manages the portfolio to generate returns while maintaining liquidity. The fund’s net asset value (NAV) is updated daily, reflecting any gains or losses. Since the underlying assets have short maturity periods, the fund is less sensitive to interest rate fluctuations, providing stable returns.
Why Should You Invest in Liquid Mutual Fund?
- Emergency Fund: Liquid mutual funds are ideal for building an emergency corpus due to their high liquidity and accessibility.
- Alternative to Savings Account: These funds generally provide better returns than savings accounts with minimal additional risk.
- Short-term Goals: If you’re looking to park funds for short-term financial goals like vacations, weddings, or down payments, liquid funds are a good choice.
- No Entry/Exit Loads: Most liquid funds do not charge entry or exit fees, allowing you to access your money without penalties.
- Tax Efficiency: Liquid funds can be more tax-efficient than fixed deposits due to indexation benefits, especially if held for over three years.
Taxation Rules of Liquid Mutual Funds
The taxation of liquid mutual funds depends on the holding period:
- Short-term Capital Gains (STCG): If you sell units within three years, the returns are added to your total income and taxed based on the income tax slab applicable to you.
- Long-term Capital Gains (LTCG): For units held longer than three years, gains are taxed at 20% with indexation benefits, which reduce the tax liability by adjusting the purchase price for inflation.
Liquid mutual funds offer a blend of security, liquidity, and tax benefits, making them a preferred option for short-term investments.
