Liquid funds are the type of scheme of mutual funds in which the investor invests their collection in market instruments such as Commercial paper, call money, bank fixed deposit, treasury bills, and other debt securities within maturity period of 90 days.
In liquid fund, the Net Asset Value (NAV) is calculated for 365 days, whereas for other debt mutual funds, NAV is calculated only for business days.Moreover, it has no lock-in period restrictions. This fund allows the withdrawals to be processed within 24 hours on business days.
They are getting popular within the retail investors because of their higher returns and easy liquidity than saving bank accounts. It has the lowest interest risk than other debt mutual funds.
Who should invest in the liquid fund?
If you want to park your ideal money for short period of time then you should consider investing in the liquid fund because it provides liquidity and not high returns.However, don’t put all your money in liquid funds, save some money for an emergency because it can only redeem the money in your account on the next day.
Hence avoid parking all your ideal money in liquid funds and keep the money for an emergency.Moreover, it should be used for achieving the short term objective. If some funds generate 8% to 9% return then you should choose it over saving accounts which generate 4% to 6% View Post return.
Benefits of liquid funds
Now we will see what are liquid funds benefits. Below we mentioned some of the benefits of liquid funds.
- Less risk – It is the lowest risk fund among all the debt mutual funds and less volatile also. It has a very short maturity period and these funds mostly invest in instruments with high credit rating.
- High return –It has a high return rate which is up to 8% to 9% over a long term period which is higher than the return rate of bank saving account that is 4% to 6%.
- High liquidity – It provides high liquidity to investors because of the moneyis invested for such a short term period. Thus, these funds allow the investors to redeem the money as per their requirements. The amount which is redeemed will be credited into your account within 24 hours.
- Instant Redemption – There are some liquid funds in the market such as ICICI liquid funds that offer the facility of instant redemption. In these funds, if you place a redemption amount online then you will immediately get the proceeds in your account.
How liquid fund taxed?
Liquid fund is a type of debt funds that attract the capital gain tax. The amount of tax depends on the investing period that is how long the investors kept their money invested. There are two types of capital gain tax, short term, and long term capital gain tax.
Conclusion – Investing in liquid funds can be a jittery activity. As a newbie tracking financial markets is not your things and if you find it difficult then take experts advice.