Liquid Funds

What are liquid funds? 
Liquid funds belong to the debt category of mutual funds. They invest in very short-term market instruments like treasury bills, government securities and call money. They are getting popular with retail investors due to their higher than savings bank account returns and easy liquidity. Once you submit a redemption request you get money back in one working day. 

When should you invest in liquid funds? 
Financial planners suggest investors should use liquid funds to park money for short periods of time typically 1 day to six months. You can also use this for short term goals like saving money for a vacation to be undertaken in the next 3-6 months, or for a tuition fees. Many equity investors also use liquid funds to stagger their investments into equity mutual funds using the systematic transfer plan (STP), as they believe this method could yield higher returns and help them beat volatility over an period of time. 

What returns can an investor expect? 
Investors can redeem their investments and the money reaches their bank account on the next working day. There is no entry or exit load by fund houses in liquid funds. As per Value Research data, the category of liquid funds has given a return of 6.94% over the last one year. This is higher than the 3.5-6% offered by banks on their savings account. 

Is there any risk while investing in liquid funds?
Financial planners consider liquid funds to carry lowest risk as well as least volatility in the category of mutual funds. This is because they generally invest in instruments with high credit rating (P1+). The net asset value of these funds sees a change to the extent of interest income accrued, including weekends.

How do liquid funds score on the tax front?
Liquid funds held for more than three years are eligible for long term capital gains tax with indexation. If you sell before three years, you have to pay tax as per your tax slab. If you opt for the dividend option, the fund will be subject to a dividend distribution tax of 29.12%.  

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