Liquid funds are part of the mutual fund debt group. You invest your money in short-term trading strategies that are considered least volatile, such as treasury bills, government securities, and call money. Retail investors who want to get more than savings bank account returns and easy liquidity are popular with them. It only takes a day or two to recover the amount you invested.
Deposited capital is not kept for long as there is no lock-in period for liquid funds.
Usually, liquid cash is deposited in a bank’s savings account, but as the name suggests, a savings account is not an investment account. Thus, the money deposited does not yield much interest. One can generally expect interest rates of 3-4 percent on it.
When to invest in liquid mutual funds
For example, my advice to investors who want to invest in best liquid funds 2019 should be for short-term purposes such as -holidays, fees for tuition, etc.
Liquid funds have proven to be beneficial for equity investors, where they can channelize their investments through the use of STP (Systematic Transfer Plan), which allows investors to resolve uncertainty over time.
You can expect to returns
On average, in the past one year, best liquid funds have given returns of over 7 percent, and savings accounts have a yield of 3.5–6 percent compared to liquid funds. There is no charge from the fund house for entry and exit load.
Liquid fund related risk
Fund houses often invest in high credit rating (P1 +) instruments, which means these instruments are in the lowest risk and least volatility category.
How is the taxation of the liquid fund?
If the units are redeemed within three years, you are entitled to pay short-term tax returns that will be paid on your tax slab. If you hold the units for more than three years, you will have to give long term tax returns. Nevertheless, you reap the benefits of indexing and the 20% tax slab.
What is indexation?
With the help of an example, it will be easier to understand the principle of indexation.
For example, in FY 2014-15, Mr. Ashish invested Rs. 1, 00,000 in debt funds and sold it for Rs 1, 50,000 in Fy-2017-18. Since Mr. Mitthu sold it three years later, the gain is long-term, and an indexation LTCG tax of 20 percent applies. CII (cost of inflation index) was 254 in FY15 and 280 in FY18. As a result, Mr. Mitthu purchase price for tax purposes will increase to (280/254) * 1, 00,000 = Rs. 110236.2205 and its taxable profit of 1, 50,000-1, 10,000 = Rs. 39764. The tax payable will be 20% of 39764= Rs. 7952.8 and not Rs. 10,000 (20% of 50,000).
Note: Investors can redeem and receive funds in their bank account on the next working day of the redemption request. Many liquid funds also offer mobile app-based instant liquidity, where the money gets deposited in your account within minutes of placing the redemption request. But you can redeem only up to Rs 50,000 per day or up to 90% of the folio price, whichever is less.