Liquid funds are short-term investment funds that invest in money market instruments like certificates of deposit, commercial paper, and treasury bills. They offer high liquidity with maximum lock-in periods of 3 days and redemption within 24 hours. Liquid funds aim to provide stable returns with minimal risk compared to other mutual funds. They are a good alternative to fixed deposits, providing potentially higher tax-free returns while maintaining low risk and high liquidity. Common types are liquid funds, which have restrictions on mark-to-market losses, and liquid plus funds, which take on slightly higher risk for higher returns.
2. WHAT ARE LIQUID FUNDS?
Liquid funds are used primarily as an alternative to short-term
fix deposits. Liquid funds invest with minimal risk (like money
market funds). Most funds have a lock-in period of a maximum
of three days to protect against procedural (primarily banking)
glitches, and offer redemption proceeds within 24 hours.
In short, a liquid fund is the same as a money market fund, but
avoids a lock-in period.
3. WHAT ARE LIQUID FUNDS INVESTED IN?
Liquid funds invest in money market instruments.
Money market is a market for short term borrowing
and lending.
This market deals with debt instruments such as
certificate of deposits, commercial paper and
treasury bills.
4. WHAT IS THE 'LOCK IN' PERIOD FOR LIQUID FUNDS?
Most funds have a lock-in period of
a maximum of three days to protect
against procedural (primarily
banking) glitches, and offer
redemption proceeds within 24
hours.
However, some funds may even
have a lock in period of a week or a
month or more. However, the
tenure is always far less than a
normal mutual fund.
5. FEATURES OF LIQUID FUNDS :
No entry and exit load is charged on the
investment amount.
Low annual fee 0.30 to 0.70%
Minimum investment requirement is Rs
5000
Great tax benefit
Easy liquidation (hence the name)
An average 8% p.a return
It has the restriction that they can only
have 10% or less mark-to-market
component, indicating a lower interest
rate risk.
Redemption time within 1 day.
6. WHAT ARE TAX BENEFITS?
If you invest in a short-term fixed
deposit, the returns are taxable as per
the investor's tax bracket. Therefore, if
you are in the highest tax bracket most
of your returns from the fixed deposit
would be wiped out.
On the other hand with liquid funds, if
the dividend option is taken, the
returns are tax-free in the investor's
hand!
7. HOW DOES IT COMPARE TO A SHORT-TERM FIXED
DEPOSIT?
Returns on investments
range between 4-5%
The interest on Fixed
deposit is taxed by adding it
to the assessor's income.
Long Tenure
Returns are fixed
Not dependent on market
performance
Returns on investments
range between 5-8%
If you opt for a dividend
option the dividend is tax
free in the hands of the
investor
Very short tenure
Returns are not fixed
Dependent on market
performance
Fixed Deposit Liquid Funds
8. DIFFERENT TYPE OF LIQUID FUNDS :
There are mainly two types of liquid funds viz; liquid
and liquid plus funds.
Liquid Plus Funds : There is another type of liquid funds
which generally invest a larger portion, of the net assets in the
debt securities having maturity period of 2-3 years or more. A
typical liquid-plus fund generally have similar investments like
a liquid fund, but around 30 per cent of the corpus is invested
in instruments with longer maturity period.
This funds are suitable for those with a higher risk appetite
wishing to earn higher return. There is no restriction for this
fund on the mark-to-market component like the liquid funds
and there is no lock-in period also.
9. DIFFERENT ATTRIBUTES OF LIQUID AND LIQUID
PLUS FUND :
Particulars Liquid Fund Liquid Plus Fund
Risk Involved Very low Comparatively higher risk
involved
Long term debt No lock in periods Has lock in periods of 5-
15 days
Exit load No exit load is charged An exit load is charged if
one redeems before the
lock in period
Restriction on fund
component
10% or less mark-to-
market component
No such restriction
Dividend
distribution tax
Dividend distribution tax
is 28.33%.
Dividend distribution tax
works out
to14.16%