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LIQUID FUNDS : DON’T Let your MONEY sit IDLE

What are the liquid funds? Are you aware ? Well, the Indian Markets are flooded with the new schemes like mutual funds and other short term instruments to make the investment of the people lucrative and to boost the confidence of investor in the Indian Market. In the same way, the Liquid Funds emerged, which are basically a very short term schemes to earn the incomes.

INTRODUCTION: Liquid funds

Liquid Funds are the open-ended high liquidity income schemes that invest its money in debt and money market instruments with the maximum maturity period of about 91 Days. They are also categorised as the Low Risk Products from liquidity and Interest rate perspective due to the reason that they are being hold for the very short term and during which the chances of fluctuation of interest rates are very lesser.

Understanding the Term: 

It means an asset which is as good as cash. Real Estate is the least liquid of all assets and the savings deposit is the most liquid of all. Liquid Funds are a kind of mutual fund or debt fund which can be redeemed in as less as 24 Hours. They are so structured to manage the cash surplus of investors and provide high liquidity and reasonable returns and minimize to no risk strategy. They do provide the investor better returns as compared to the Bank Short Term Fixed Deposits.

Some of the Pertinent Features :

  • No Entry & Exit Load (Except in case of Liquid Plus Funds if redeemed before lock in period)
  • Variable Minimum Investment Amount according to Scheme
  • Great Taxation Benefits to Investors
  • Easy liquidation as the name suggests
  • An average 8% return on liquid funds
  • They bear the lower interest rate risk and credit risks

Difference between Bank Fixed Deposits and Liquid Funds

FIXED DEPOSITSLIQUID FUNDS
Returns on investment range in between 4-6%Returns on investment range in between 7-8%
Typically are of Long TenureThey are short tenures
Returns are FixedReturns are not Fixed
Not dependent on market performanceDependent on market performance

 

Level of Risk in investment in liquid fund:

One should know that risk in the liquid funds are much lesser as compared to the other funds. Further, the probability of default risk is also very lower due to the shorter maturity period of investment portfolio. Hence, being a short term investor, one should consider investment in these types of schemes to earn the handsome profits.

Type of Liquid Funds

Basically there are two types of the Liquid Funds:

(i) Liquid Funds

These are very short term debt funds, which invest the money in the money market instruments such as Certificate of Deposits (CDs), Commercial Papers (CPs) and treasury bills. They invest for a maturity of less than a year, treasury securities and money market instruments. These instruments are then held for a period of 3 – 6 months or even a lower time period such as for few days or months. These type of funds generally do not invest in a debt securities having maturity period of more than one year. Most of the investors go for these types of funds.

(ii) Liquid Plus Funds

These types of funds are generally invest a large portion, of the net assets of the portfolio in  debt securities having a maturity period of 2.5 to  years. These types of funds are suitable for those who are ready to bear the higher risk with a motive of earning higher returns.

Given below is the description of both the funds with some pertinent charateristics:

ParticularsLiquid FundsLiquid Plus Funds
Involvement of RiskVery LowComparatively Riskier
Long Term DebtCannot invest in the Long Term Instruments bearing heavy interest rates.Around 25 to 30% of the total amount is invested in the long term debt bearing higher interest rate.
Lock In PeriodNo Lock In PeriodsHas Lock in Period of 10 to 15 Days
Dividend Distribution TaxDDT is at 28.33%DDT works out to 15 % approx..
Exit LoadNo exit load is charged as it does not have any lock in periodAn exit load is charged if one redeems before the lock in period.

 

Conclusion

Investors should consider certain aspects before selecting a liquid fund, such as background of fund house, fund manager’s experience, track record and expenses of fund (indicated by the expense ratio). Liquid funds have lower risk profile but not risk free like the bank FDs (as already discussed above). There is always an interest rate related risk and also credit or default risk in liquid fund. Investors should becautious / careful about that and can exit before the interest rate changes occur in the market. Investors should better select such a liquid fundwhich has highest exposure in Govt. Treasury bills and call money market instruments and can avoid fund having higherexposures

Finally, equity market at present is still waiting for an all clear upward signal, so in this uncertain time, liquid funds remains a good option for retail investors to make short-term gain. If you want to start investing in the best liquid funds and mutual funds, I suggest open free investment account at fundsindia where you can invest and manage your investment portfolio 100% free with free guidance about investment. You need to fill sign up form, enter pan number and basic details and verify kyc documents. Click here to get free investment account.

3 Comments

  1. By Sharda Bamne

    Hi Tarannum,

    This is not a comment just wanted to ask that you write lot anout TDS, Service Tax, Income tax, etc. but I never found tab for Mvat. Its a request if you add mvat tab where we can read lot about mvat or suggest me where should I read about mvat. Because I read about TDS & Service tax on tax masala whre you give the required details of both. Likewise, please give information about mvat i.e. with examples wherever required.

    • By admin

      There are different vat rules for different states and it is difficult to get time for writing on all those rules. That’s why I have removed category of VAT.

      • By Sharda Bamne

        Ok, no prob. Thanks for reply.

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