Anybody familiar with the world of mutual funds will have come across the phrase liquid funds. A liquid mutual fund is an open-ended scheme that invests in money market and debt instruments like governmental securities and bonds for a short period of time and matures after 91 days exactly. The goal of investing in a liquid fund is to mitigate the risk associated with interest rate volatility. These are normally lump sum investments, but one can invest through SIPs in the liquid funds of their choosing as well.
One gets high liquidity from their liquid fund along with stability in income. Here are some of the benefits one gets from investing in a liquid mutual fund.
In general, liquid mutual funds are classed as a low-risk product. This is because they are highly liquid in nature and there are barely any fluctuations in their interest rate due to their short investment tenure. With lower fluctuations, one can be somewhat assured of their gains from the fund right from the beginning of their investment. Even the returns on investment with liquid funds fluctuate very little, as they invest primarily in debt instruments such as bonds. Hence, these factors make them a reasonably low-risk investment.
Any credit risk, which is otherwise known as the risk of default, is also reduced in liquid funds. The reason for this is that liquid funds have a short maturity period that typically lasts just 91 days. Hence, when one carefully evaluates the credit fundamentals of the liquid fund, they further mitigate this credit risk. By evaluating the fundamentals such as quality of management, parentage, sector, and ratings, one significantly lowers their risk.
Additional Read: Which Investment Option Is Best For The Risk Averse Investor?
For the simple reason that liquid funds experience low volatility and mature quickly, they make great short term investment options. A liquid mutual fund is incredibly convenient as it is perfect for meeting contingencies or parking any surplus investment gains. Different mutual funds have certain restrictions on their scheme policy documents, so be sure to carefully read through the fine print before investing. However, the typical liquid fund matures after 91 days. You can choose to invest through SIPs or as a lump sum investment in the fund of your choice.
Easy Access to Debt Market
With a liquid mutual fund, you get the low risk of debt instruments at attractive interest rates of debt markets. Most liquid funds do not require large-scale investments. You can invest an amount as little as ₹5000 and access the debt instruments of your choosing. Hence, liquid funds give you the potential to earn from wholesale debt as these instruments offer a more attractive rate of interest than the average savings instruments.
Additional Read: Advantages of Having Debt Mutual Funds in Your Portfolio
With fixed instruments, you do not have the option to alter your payouts based on your needs. This is not an issue with liquid funds. You get flexibility in how you want to invest, grow, and receive dividend payouts. For instance, you can opt to receive your dividend payout every week or every month, depending on your income needs. This fund serves as an income replacer. You also get the option to move your holdings to an equity fund as and when you see fit. This flexibility mitigates any risk of loss. Best of all, your funds are always accessible to you, as there is no lock-in period with liquid funds. For the most hassle-free experience, you can use the Instant Redemption feature of Moneyfy app by Tata Capital to invest your ideal money into liquid funds.
Earnings and Taxation
Liquid funds help an investor earn in two ways
- Capital gains: when a fund’s units are redeemed for a higher price than the purchase price- are taxable. If your liquid fund is held for less than 3 years, STCG tax, or ‘short term capital gains’ tax, is applied to your capital profits which are applied to individuals according to their income tax slab. If you hold your liquid funds for longer than 3 years, long term capital gains (LTCG) taxation is applied on your earnings which is fixed at 20% post indexation.
- Dividends: As of April 2020, dividend income earned is taxable as per one’s applicable personal tax rate. A TDS of 10% has also been introduced for dividends over ₹5000.
If you are looking for an all-in-one platform to invest, compare, and earn from mutual funds, try the Moneyfy app by Tata Capital. You can conveniently start SIPs or invest lump-sum amounts in liquid mutual funds, equities or bonds, insta-redemption funds, and more from the Moneyfy app on your smartphone. Start working on earning a passive income to hit your financial goals with Tata Capital’s Monefy App.