Synopsis
A Liquid Fund typically invests in fixed income securities wherein a portfolio is created having a mix of debt and money market instruments.
There are different types of Mutual Funds to suit the different financial goals of different investors. Contrary to popular belief, you need not always have a long term time horizon for investing in Mutual Funds. You can also invest idle cash in your bank account for a shorter tenure. This brings us to the concept of Liquid Funds.
What do you understand by a Liquid Fund
A Liquid Fund typically invests in fixed income securities wherein a portfolio is created having a mix of debt and money market instruments. Examples of money market instruments include treasury bills, certificates of deposits, commercial papers etc. These instruments have a short maturity and the liquid fund invests in securities that have a maturity of up to 91 days.
What are some of the key features of a Liquid Fund
High Liquidity –
As understood, Liquid Funds invest in instruments having short term maturity. Thus, these funds are highly liquid. Being an open-ended scheme, you can redeem from the fund at any point in time subject to an exit load. However, withdrawal from the 7th day onwards would not attract any exit load. The details of the exit load are tabulated below:
| Exit upon subscription/switch-in | Load as a % of redemption proceeds |
| 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 | Nil |
Potential of Generating Reasonable Returns with comparatively lower
volatility –
The Fund creates a portfolio of debt and money market instruments which are short term in nature. Short term debt instruments are less volatile compared to long term bonds to the changes in interest rates. Thus given the nature of the underlying instruments, the fund has the potential of generating stable returns.
ModestInvestment Amount* – Generally, one can start investing with a modest amount of Rs 500
Instant Redemption* – Most fund houses provide an instant redemption facility wherein the withdrawal proceeds are instantly transferred to your bank account through the Immediate Payment Service i.e. IMPS facility. The monetary limit under IAF(Insta access facility) is INR 50,000/-or 90% of the latest value of investment in the scheme, whichever is lower. The redemption takes place at the applicable Net Asset Value (NAV).
How are Liquid Funds taxed
- Capital gains represent the increase in the value of assets. It is the difference between the purchase price and the redemption value. The gains can either be short term or long term in nature.
- Short Term Capital Gains (STCG) – If an investor sells or redeems from the fund after a holding period of up to 3 years, the gains made are short‐term capital gains. This is taxed at the income tax slab rate applicable to the investor. Long Term Capital Gains (LTCG) – If the investor holds the fund for more than 3 years, the gains made attract long term capital gains tax; LTCG is taxable at 20% after indexation. Indexation accounts for the effect of inflation in the purchase cost i.e. the purchase price is increased to adjust for inflation (using an index provided by the Government) before calculating the capital gain. Thus, it benefits the investor as it reduces the overall tax liability.
Who can investin a Liquid Fund
Investors Wanting Liquidity – As captured above, Liquid Funds are highly liquid in nature. Hence, it is an ideal investment option for investors wanting easy accessibility.
Investors Seeking an Alternate Avenue – Investors having some idle funds in their savings and current account, can consider parking their funds in a Liquid Fund.
Investors Looking for Systematic Transfer Plans (STP) – STP implies the transfer of funds from one mutual fund scheme to another. An investor can make use of a Liquid Fund as a mode to invest in equity funds. Money can be initially invested in a Liquid Fund and then systematically transferred into an equity fund. Thus the Liquid Fund becomes the source or transferor scheme, and the equity fund becomes the target or destination scheme.
Conclusion
Liquid Funds are an ideal investment avenue for a short term investment horizon. It not only offers an alternative to parking excess funds but also aids in genrating reasonable returns.
Disclaimer –
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This creative is under Investor Education and Awareness Initiative of UTI Mutual Fund. To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under “Intermediaries/market Infrastructure Institutions”. For any queries, grievance redressal investor may reach out to the respective fund house. Additionally, investor may lodge a complaint at https://scores.gov.in , a portal provided by SEBI (SEBI Complaints redress system) if not satisfied with the response given by the fund house.
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