Hello Readers!

In the last some years, investment in Mutual fund has gained large scale popularity among Indian investors. As per a survey, it is said that after demonetization in the year 2016, Mutual Fund Investment experienced a lot of new investors, but irony is, still there are some people in society, that back out from mutual fund investment, because they think that investing in mutual fund will lock their money for long term, and they won’t have any access to their money, that is they cannot get their money at the time of emergencies, and if they will redeem their fund early then they will receive a low return.

Well, if you are also one among these investors, then dear I really want to say, mutual fund investment has a kind of fund popular as Liquid Debt Fund, that aims at providing a high degree of liquidity and safety of the capital to investors, that is the investor has complete access to their funds and they can redeem it whenever they need, and most important thing, they will receive a good return.

Through this blog we are going to discuss Liquid Debt Funds, how do they work and who should invest in Liquid Fund.  

WHAT ARE LIQUID FUNDS?

Liquid fund is a type of Debt Fund that focuses its investments in short-term fixed-interest generating money market instruments. As liquid funds aim to generate good returns over a short period, its fund manager, mostly invest in high-credit quality debt instruments, with short-term maturities (up to 6 months).

How does LIQUID FUND work? 

Well, let us understand the working of liquid funds through the following points:

1. Liquid funds invest in debt and money market instruments, that have a very short maturity period, of only up to three months that is 91 days. As these funds have very short maturity, its investors generally hold these funds till maturity, and this saves liquid funds from the effect of risk that comes from the interest rate volatility.
2. Liquid funds do not have any kind of lock-in period, this ensures the investors that, they can redeem their fund whenever needed.
3. If the investment is done in the liquid fund before 2 PM of any particular transaction day, then funds are allotted to the investor based on previous day NAV (Net Asset Value) of the fund.
4. Being a short-term investment, liquid fund mostly invests in instruments with a high credit rating. Net Asset Value (NAV) of the liquid fund, mostly changes with the change in the interest income that the fund receives.
5. No exit load or entry load is charged on Liquid Funds, by the fund houses, however, a kind expense ratio is charged, as a fee for managing and operating the fund.
6. The redemption of liquid fund unit before 3 PM of any particular transaction day, is done as per previous day NAV (Net Asset Value) of the fund.   
7. When the investor redeems his funds, the return is credited in their respective bank account the very next day.

FACTORS TO LOOK UPON BEFORE INVESTING IN LIQUID FUNDS

1. Risk: Risk in liquid funds generally arises due to fluctuating NAV (Net Asset Value) of the fund, but here the advantage is, liquid funds have very short-term maturity, and because of this, the NAV doesn’t fluctuate too frequently. This hinders the liquid from getting adversely affected by the risk of fluctuating NAV. However, the fund value might drop-down, with a sudden drop in the credit rating of the underlying security. Thus, liquid funds can be considered as less risky, but not risk-free!
2. Returns: Despite having short-term maturity, liquid funds are found to generate good returns, with a rate of interest up to 7-9%, which is much better than savings account return rate that is only 3-4%. Although liquid fund does not guarantee a fixed return, they have delivered positive returns upon redemption.
3. Cost: Like other funds, liquid funds also charge a kind of managing and operating charge on the fund, that is expense ratio, however, there is a limit set for expense ratio in liquid funds by SEBI (Security Exchange Board of India). SEBI has mandated the upper limit of expense ratio to be 1.05%. Liquid funds maintain a low expense ratio to offer comparatively higher returns over the short term.
4. Investment goals: If the investor wishes to raise emergency funds, then investing in liquid funds can be the best investment option for them. Also investing in liquid funds offers high liquidity to its investors, which will help them to take their money out quickly in case of emergencies.

WHO SHOULD INVEST IN LIQUID FUNDS?

Investors, who think that storing their money in Savings account is a good option, as it is providing a return with a 3-4% rate, then these investors need to think about liquid funds. Liquid funds are the best investment cycle, where you can put your unused money. Investing in liquid funds will give its investor, complete access to their money, like in savings account, and as liquid funds have short-term maturity, investors can receive the returns in a very short period.

In short, liquid funds are the best option for those investors, who are looking for a short-term investment, to park their idle cash, and earn some benefits. 

Well, investors can also use their liquid fund investment for investing in an equity fund. For that, they can initially invest the money in a liquid fund, and then opt for a Systematic Transfer Plan (STP), to an equity fund of their choice.

TAXATION IN LIQUID FUNDS

Liquid funds are a type of Debt funds, and the taxation in liquid funds will be the same as Debt funds. The rate of taxation depends on how long you stay invested in a debt fund.

In Debt Fund, gains earned in the first three years of investment is known as short-term capital gains (STCG), whereas capital gains earned over three years of investment or more is known as long-term capital gains (LTCG).

STCG from debt funds are added to the investor’s income and taxed according to his/her income slab. LTCG from debt funds is taxable at a flat rate of 20% after indexation.

As of now, you are aware of the concepts of Liquid Funds and its features, so do plan your investment in liquid funds, and raise money for your financial emergencies. Here I am listing some best performing liquid funds, where you can consider your investment.

 #As per 10^th December 2019 

Most importantly, always consult a financial planner or advisor, before starting your investments. They will help you select the best fund, for your investments as per your requirement.

You can also contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).