हिंदी में पढ़े
Table of Contents :
What are Liquid Funds?
Debt Mutual Funds that predominantly invest in debt securities with short term maturities, that yield fixed returns are known as Liquid Funds. These debt securities comprise money market instruments such as treasury bills, commercial paper, certificates of deposits with maturity period up to 91 days. The fundamental advantage of investing in liquid funds is the high liquidity they offer. Liquidity refers to the degree of how quickly an asset can be bought/sold and converted to cash.
To know more about Money Market Instruments, click here.
A Good Credit Score ensures you manage Your Finances Well Check Score
What are the Benefits of Investing in Liquid Funds?
- Fixed Returns:
Since liquid funds invest in debt instruments that offer fixed interest rate, the returns from investment in these are fixed. As the securities mature, an investor gets back the principal amount coupled with the fixed interest that the instruments offer.
- High Liquidity:
Owing to short term maturities of the underlying invested instruments, liquid funds are highly liquid. One can redeem the invested capital as per his/her convenience. There is no lock-in period on investment in liquid funds.
- No Exit Load:
A plus point to high liquidity that the fund offers is that there is no applicable exit load when you withdraw the invested capital after 7 days of investment.
- Low Risk:
The investment portfolio of liquid funds consists of short term money market instruments. The highest maturity of any invested security is 3 months, which effectively protects the portfolio from interest rate changes.
- Higher Returns than Savings Account/Fixed Deposits:
Liquid funds are gaining popularity amongst the retail investors because of their ability to deliver higher returns when compared to investment in Bank Fixed Deposits or Savings Account. Also, their high liquidity makes them a better alternative to Savings Account, given that the returns are comparatively higher for liquid funds.
Over the years, liquid funds have delivered returns of more than 7%, that is significantly higher than 4-5% returns offered by Savings Accounts.
Get Free Credit Report with Complete Analysis of Credit Score Check Now
How are Liquid Funds Taxed?
Returns from Liquid Funds are taxed based on the holding period of invested capital:
- If you withdraw the amount before three years of investment, Short Term Capital Gains (STCG) Tax as per the income tax slab of the investor. For instance, if an investor gains ₹30,000, via investment in liquid funds, ₹30,000 are added to income tax slab of the investor and taxed accordingly.
- If an investor withdraws the investment including capital gains post 3 years of investment, Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.
Also Check: Liquid Funds vs Savings Account
How to Choose a Liquid Fund?
- Historical Performance
Although past performance is not the right attribute to judge the future performance of a fund, it is still one of the parameters widely considered for choosing which fund to invest in. If the fund has consistently performed well over the years, beating its benchmark and category returns, one can invest in that specific fund, as it is expected that the fund will perform equally well in the future. - Credit Quality
Investors should opt for that liquid fund whose investment portfolio consists of debt securities that are highly rated by CRISIL. A high credit rating ensures that credit risk is minimized. Credit Risk refers to risk of issuer of security defaulting on payment of principal amount and interest. This risk is quite low for debt instruments with high credit rating. - Average Maturity of the Portfolio
Investors should look at the average maturity period of the overall investment portfolio. If it is 3 months or less than that, then it is a good fund to invest in. A short term maturity period ensures that the portfolio is immune to interest rate fluctuations that occur in the long term. - Expense Ratio
Pick up that liquid fund which has a low expense ratio, as this increases the overall returns delivered by the fund.
When should you invest in Liquid Funds?
- Financial experts recommend liquid funds to investors who want to park their idle cash for a short term and earn decent returns from the same. Since liquid funds offer better returns than savings accounts, it is better to put the idle cash in the former.
- The accumulated corpus can be used to fulfill short term financial goals in the next 4-5 months.
- One can also use Systematic Transfer Plan (STPs) to use the accrued capital in a liquid fund for SIP installment in an equity fund. This strategy generates higher returns and helps in mitigating market volatility, over a long term.
How to invest in Liquid Funds?
- Sign Up/Sign In to Paisabazaar.com
- Select Direct Mutual Funds
- Click on the section of ‘Liquid Funds’
- Select the fund in which you want to invest from the available list of liquid funds. You can compare similar schemes and use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment.
- Click on ‘Invest Now’, to select either Lump sum or SIP
- Happy Investing!
For a detailed explanation on how to invest in mutual funds, click here.
List of Best 5 Liquid Funds to Invest in 2020
| Fund Name | AUM (cr.) | 1 Year Returns | 3 Year Returns | 5 Year Returns |
| Aditya Birla Sun Life Liquid Fund | ₹40,835 | 6.70% | 6.99% | 7.43% |
| Axis Liquid Fund | ₹29,119 | 6.61% | 6.98% | 7.39% |
| Nippon India Liquid Fund | ₹24,235 | 6.69% | 7.00% | 7.42% |
| Franklin India Liquid Fund | ₹12,529 | 6.85% | 7.07% | 7.49% |
| Baroda Liquid Fund | ₹6,071 | 6.62% | 7.00% | 7.46% |
{Data as on January 15, 2020; Source: Value Research}
A high Credit Score may help you get a credit card with better benefits. Check Now
FAQs
Q. Are Liquid Funds Risk Free?
A. Not necessarily. Since these funds invest in fixed- income generating securities, wish a short maturity period, they carry low risk on investment. However, the possibility of issuer of debt security defaulting on the final payment always persists.
Q. How are Liquid Funds used in STPs?
A. Investment plus accrued interest in Liquid Funds is systematically transferred to Equity Mutual Funds at periodic intervals. This is known as the Systematic Transfer Plan (STPs).
Q. How soon can I get my money back from my Liquid Fund?
A. Instant redemption facility is available for many liquid funds offered by different AMCs, wherein an amount upto ₹50,000 can be instantly withdrawn, and it reaches the bank account of the investor in a few minutes.
Q. Do Liquid Funds have an exit load?
A. The exit load for Liquid Funds is charged in the following manner, starting from day 1 of the subscription:
Day 1 – 0.0070%
Day 2 – 0.0065%
Day 3 – 0.0060%
Day 4 – 0.0055%
Day 5 – 0.0050%
Day 6 – 0.0045%
Day 7 Onwards – 0.0000%
Q. Do Liquid Funds have a lock-in period?
A. No. There is no lock-in period for Liquid Funds.