Liquid funds are open-ended debt mutual fund schemes that invest in short-term securities such as treasury bills, certificates of deposit, commercial papers, and fixed deposits for companies.
Such funds invest in securities in the money market with a residual maturity of less than or equal to 91 days. It helps fund managers to meet investor demand for redemption.
Besides, there are more benefits; these funds have the opportunity to make more profit than other traditional investment options with a savings bank account, which is primarily enjoyed in a savings bank account with high liquidity. Additionally, liquid funds have lower risk rates and you have the opportunity to earn additional returns relative to a bank’s savings account (this can go up to 6-7 percent).
A savings bank account will often be an investor’s preferred option when investing in surplus funds. Even if you create an emergency corpus that you may need in times of crisis, you cannot think beyond a savings bank account.
However, it is not prudent for investors to put short-term funds in a savings bank account.
That’s because –
- Cash in a savings bank account will get 4 percent interest per year. Some banks offer a 6% interest rate, which is slightly higher. However, over the past 1-year period, the best liquid funds have achieved average returns of around 7 percent. Liquid funds rate on savings bank account on returns alone.
- There is no lock-in period for liquid mutual funds. Withdrawals are also processed immediately, and shareholders collect the balance in most liquid funds within half an hour.
- In liquid funds, long-term capital gains (over three years) after indexation are taxed at 20 percent. However, short-term capital gains are added to your profit and taxed at normal applicable rates.
- While there is no indexation incentive in the savings bank account, any interest income you receive will be added to your income and paid according to the income tax rate.
- There is no entry or exit load for liquid funds.
- Liquid funds have the lowest debt-fund interest rate risk. They primarily invest in short-term maturity fixed-income securities.
You can redeem liquid funds immediately
There are, of course, some liquid funds that offer immediate redemption options, which allow up to 50,000 or 90% of the investor’s available balance. Some of the liquid fund schemes that facilitate immediate withdrawal are:
- Reliance Liquid funds
- Dsp Blackrock liquidity fund
- ICICI Prudential Liquid fund
And the best part is that there are many apps available in which you can get your liquid funds instantly with a tap on your mobile screen. You do not need to visit a branch of AMC. You can invest in a liquid fund with your mobile device and withdraw it anytime, anywhere, with one tap. You have full access to your money on public holidays or Sundays. Redemption will be credited to your savings bank account within 5 minutes.
I hope this article will help your investment.