A Liquid Fund is a mutual fund that invests primarily in money market instruments, such as treasury bills, bank deposits, corporate papers, etc., having maturities below 91 days. Most of the investments of a liquid fund carry low risk. These funds are extremely liquid in nature and can be withdrawn overnight without an exit load
- Annualized Returns:
Liquid funds provide a better rate of interest than a savings bank account does. Unlike Bank FDs they do not carry any penalties for early redemptions. You can earn an average return of 6.5% to 7% on the liquid funds.
- Liquid Funds-Taxation:
If you have growth plan, short term capital gains on the units sold within 36 months are taxed at slab rates. The units that are redeemed after 36 months will attract the long-term capital gains at 20% with indexation.
In case of the dividend plan, the dividends distributed attracts the dividend distribution tax of 28.84%% which is deducted by the mutual fund house before distribution to investors.
- Liquidity:Liquid funds are considered among the most liquid investments and carry no exit load, and can be withdrawn overnight. High liquidity is among the main reasons why liquid funds are used for emergency corpus.
When Should You Consider Investing in Liquid Funds?
Investing in liquid funds proves to be highly beneficial in the short-run. Since these funds are highly liquid and carry very low risk, one can park excess money in liquid funds. Sudden influxes of cash, say from a bonus or the sale of a house property, can be invested in liquid funds to maximise the money’s productivity.
How are Liquid Funds Different?
Liquid funds invest into highly liquid money market instruments that can be redeemed very quickly whereas the other debt funds invest in various fixed income securities or the money market instruments.
Since, money is invested for a maximum period of 90 days in liquid funds, you can earn more stable returns as the risk on interest rate fluctuations is very less. On the other hand, in case of other debt funds, the money is invested for longer time period and the returns may vary depending on the market conditions.
The Bottom Line:
Investing in liquid funds is very beneficial when you have got excess money in your hand. Apart from this, liquid funds are an effective way to store your emergency fund, because such funds carry very low risk and provide better returns.