liquid mutual funds

As an investor, what you should know about liquid mutual funds

Liquid funds are a kind of debt mutual funds. They invest and call in very short-term financial instruments such as treasury bills, government securities. As savings bank account returns higher than easy liquidity, they became popular with retail investors. After applying for redemption, you will get the money back in one working day. 

What time should you invest in liquid funds?

Financial planners say investors should use liquid funds to raise capital for short periods, typically from one day to six months. You can also use it for short term goals such as saving money for vacation or tuition fees over the next 3-6 months. Most equity investors use liquid funds to determine their contribution to mutual funds using the Systematic Transfer Plan (STP), as they believe that this strategy can yield high returns and to avoid volatility over some time. 

Can an investor expect returns?

Investors can withdraw their savings and the cash will enter their bank account on the next working day. There is no entry or exit load to liquid funds through fund houses. According to Value Research data, Liquid Fund has achieved a return of 6.94 percent in the last year. That is better than 3.5-6 percent on their savings account provided by banks. 

Are there any risks when investing in liquid funds?

Financial planners consider liquid funds as the lowest risk as well as the lowest volatility in the category of mutual funds. It is because they typically invest in high credit rating (P1 +) instruments. The net asset value of such funds refers to the change in the amount of income earned, including holidays. 

Do liquid funds score on the tax front?

Liquid funds held for more than three years are eligible for high indexation term capital gains tax. If you sell before three years, you will have to pay tax according to your tax slab. If you choose the dividend option, the fund will be subject to a dividend distribution tax of 29.12%. 

Can a return be higher than bank FD?

Return on liquid funds can be more than just a fixed deposit. In times of high-interest rates, liquid fund banks may offer better returns than FDs. 

Taxation – Index Profit after 3 Years

After three years of investment, a long-term capital gains tax is levied on debt funds at 20% with indexation. The index adjusts investments over the holding period for inflation. The longer the hold time, the higher the indexing value.

Let me explain to you, three years ago, on 15 January 2016. A person invested Rs. 1, 00,000 in a liquid fund, which gave him a return of 8.5 percent, and on 15 January 2019 (after three years), he got Rs. 1, 27,729. His total profit was Rs. 27,729, but his taxable profit is only after adjusting for indexation, 851. Therefore, the post-tax net return was 8.44 percent. Indexing is not availed on savings accounts, FDs and RDs; it is available only on debt mutual funds, if the holding period is more than three years.

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