Guide to Liquid Funds: Features and benefits

liquid mutual funds
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Mutual funds can be categorized differently. Debt funds are one such category that is known to carry the lowest amount of risk. Debt funds can be further categorized into various types. One of these is liquid funds. Liquid funds are ideal for short-term goals and can be highly liquid, just like their name suggests. If you are interested in investing in them, here are some things you must know.

liquid mutual funds

What are liquid mutual funds?

Liquid funds are open-ended debt funds. These mutual funds are highly liquid and can be used to store your idle money, your emergency fund, etc. You can also invest in them for your short-term goals. Liquid funds invest in high-rate debt instruments, such as certificates of deposits (CDs), treasury bills, commercial papers, etc.

What are the features of liquid mutual funds?

Here are some features of liquid mutual funds:

  • Liquid mutual funds have minimal lock-in periods that can range from 3 days to a maximum of 3 months or 91 days.
  • Liquid funds are low-risk instruments and ideal for short-term goals.
  • They are extremely liquid and can be liquidated instantly without any exit loads.
  • The expense ratio of these mutual funds is also quite low as they are passively managed. As per the Securities and Exchange Board of India (SEBI), this has been capped at a maximum of 1.05%.
  • Liquid funds may offer returns ranging from 7% to 8%.
  • Liquid mutual funds are taxed like debt funds. Your short-term capital gains (STCG) for investments held for less than three years are taxed as per the income tax slab you fall into. Your long-term capital gains (LTCG) for investments held for three years or more are taxed at 20% after indexation.

What are the benefits of investing in liquid mutual funds?

Here are some benefits of investing in liquid mutual funds:

  • Liquid mutual funds can be used as a substitute for a bank’s savings account to earn a higher interest. While a bank savings account can offer approximately 4% interest, a liquid fund can offer 7% to 8% interest.
  • Liquid mutual funds are low-risk funds. So, they are ideal for investors with a low risk appetite.
  • Liquid funds offer better taxation benefits, so your ultimate profits are maximized. Your long-term gains are taxed at 20% after indexation. This helps you save money on tax. on the other hand, your short-term gains are added to your income for the year and taxed as per your tax slab.
  • Liquid funds allow you to invest in a lump sum as well as through a systematic investment plan (SIP).
  • Liquid funds can be great for diversification. They can help reduce risk from your portfolio.

To sum it up

Liquid mutual funds can cater to a number of investment purposes. Right from short-term goals and tax benefits to diversification, you can invest in liquid funds and benefit in several ways. However, keep in mind that even though they are low-risk, they still carry some amount of credit and inflation risk. Nevertheless, they can be excellent short-term instruments. If you want to invest in liquid mutual funds, check out the Tata Capital Moneyfy App and start your SIP in a liquid fund of your choice today.

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