KNOWLEDGE CENTRE Debt Funds / What Is Liquid Fund?

What Is Liquid Fund?

Liquid Mutual Funds are a type of debt mutual funds which has a short period of investment. They are open-ended schemes that allow investors to park their funds for a small amount of time. Investors can redeem their units in the form of cash at any time without paying any extra exit fees. Due to all these advantages, liquid funds are a good alternative to fixed deposits.

How Do Liquid Funds Work?

Liquid funds invest in high credit rating instruments such as treasury bill, commercial papers, and certificates of deposit. Liquid mutual funds mature generally in 10 days or goes up to even 3 months. Since these are mostly government securities, the risk factor associated with them is also quite low.

What Are The Advantages Of Liquid Funds?

Liquid funds are ideal for investors who want to park their money for short period of time. The aim of these funds is to provide higher returns than bank accounts while offering a similar level of security for the money invested. Here are few of the advantages of liquid mutual funds:

  1. Higher Returns During Inflationary Markets
  2. High Liquidity With No Lock-In Period
  3. Minimal Risk Associated With Funds
  4. Tax Benefits Compared To Savings Accounts

Let’s look at the three above mentioned advantages in greater detail:

Higher Returns During Inflationary Markets

During high inflation, liquid mutual funds are the best investment instruments available to the individual. RBI keeps a high-interest rate and tightens the liquidity. This, in turn, provides good returns on the liquid mutual funds.

High Liquidity With No Lock-In Period

The liquid funds have no lock-in period and can be withdrawn within 24 hours on request. The cut off time of the withdrawal is 2 PM. If one attempts to withdraw after that, it is processed by 10 AM the next day. The liquid funds have no entry and exit loads.

Minimal Risk Associated With Invested Money

Most of the investments that liquid funds make are in government securities. Owing to this fact and also that the maturity period is 91 days, the risk associated with these funds are quite low. The lower investment period also removes the risk of credit rating fluctuations affecting your money.

Tax Benefits Compared To Savings Accounts

Did you know that savings account balances will need to give tax as per the tax slab? Liquid funds too are taxed at the same rate if held for less than a year. Opting for a dividend pay-out if you fall under the 30% tax bracket or daily dividend reinvestment.

How To Invest In Liquid Funds?

The liquid mutual funds provide good liquidity and low-interest rate risk. It is the best parking option for individuals and corporates alike. For all these reasons, liquid mutual funds are a good alternative to fixed deposits. Most schemes offers redemption process that’ll deposit the money back into your bank account within 24 hours. You can invest easily in liquid mutual funds by contacting your broker or by downloading the Angel Bee app.

So now that you know what are liquid mutual funds and their advantages, you can easily decide if they make the right choice for the financial goal you would like to achieve through mutual fund investment. If you’re not sure about exactly which AMC’s fund to invest in, try our ARQ mutual fund advisory. It analyses all the best performing liquid funds and suggest you the one that best fulfils your needs.

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