What are Liquid Funds?

liquid fundsLiquid funds are primarily a scheme of debt mutual fund which can be utilised by investors at a time when they have excess funds at hand which they wish to use in the near future. Investors who are willing to put a big amount of money in equity funds but at the same time they want to stretch the investment horizon over a period of time and break it at short intervals, they can invest in liquid mutual funds through systematic transfer plan.

Returns & Risks involved in liquid funds

Liquid mutual funds just like other mutual funds put money in the market priced securities. The movement of the market price of the securities affects the NAV of liquid fund investments. The interest accrued on debt funds over the securities is equally divided into the number of days the security was held for. The prices of the security tend to remain steady and so the movement of the NAV of liquid funds is somewhat linear like a steady line. Liquid fund Investors can expect to earn returns around 6-7% on their liquid fund investment in a year.

Liquid funds are not really devoid of risks when an investor invests in liquid funds that have put money in securities whose credit ratings and market price have dropped considerably, the NAV of their liquid funds will drop too. To curtail the risk involved, most debt funds put money in scrips that have a maturing period range of over 15 to 20 days.

Features of liquid funds

Interest Rate

Liquid mutual funds offer investors a higher return. Investors who put their money in liquid funds and not just any savings account tend to earn higher returns courtesy the rate of interest on them which is comparatively higher when compared to the interest offered by most of the savings accounts.

Dividends Earned

The dividends that investors can earn through liquid investments are subjected to a tax called the dividend distribution. Even after tax, the dividend that investors earn on liquid funds is still better than returns offered by savings accounts.

Tax Structure

Liquid investments offer an advantage of tax benefit to its investors. The tax applied to long-term gains is 20% and is inclusive of indexation. While in the case of short-term capital gains, the gain is added to investors’ income and the regular rate of prevailing tax is applied to it as per the investors’ tax bracket.

Flexibility

Liquid mutual funds are flexible; investors can withdraw from it whenever they are in the need for cash. At the same time, investors can invest a big amount in liquid funds when they have extra money at hand. The fact that there is no fixed minimum investment horizon in liquid funds makes liquid fund investments even more flexible in nature. Investors can avail immediate transfer of funds into their bank accounts within a day the request for redemption before cut-off has been made by them.

When should you invest in liquid funds?

At a time when a person has extra cash at their hands due to maturity of any scheme or financial settlement, instead of putting them in savings accounts, investors can put the extra cash in liquid funds for better returns. When investors want to invest a big amount at one time, they should utilise the advantages of liquid funds to enhance their earnings on liquid investments. In other words, if investors want to earn better returns on their extra cash and want to hold the cash at hand for a short duration they should consider putting their money in liquid investments.

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