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Liquid Mutual Funds

Liquid funds are one of the debt funds. It requires a clear understanding of your investment horizon since they are categorized based on duration. From overnight funds to long-duration funds of 7 years, debt funds have been classified into 16 different categories. This move by SEBI is to help investors find the right type of fund without being overwhelmed by the choices.

Here, we will explore Liquid Mutual Funds and discuss everything you need to know about them before investing.

List of Liquid Mutual Funds

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What are Liquid Funds?

A Liquid Mutual Fund is a debt fund that invests in fixed-income instruments like commercial paper, government securities, treasury bills, etc., with a maturity of up to 91 days. The net asset value or NAV of a liquid fund is calculated for 365 days. Further, investors can get their withdrawals processed within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category.

Features of Liquid Funds

The main characteristics of a liquid fund are:

  • No Entry and Exit Load: Since liquid mutual funds are highly liquid, they often do not have an entrance or exit load.
  • Variable Minimum Investment: The minimum amount required to invest in a liquid fund varies for each program.
  • Low-Interest Rate Risk: Liquid funds have the lowest interest rate risks when compared to all other debt funds. This is because liquid funds primarily invest in fixed-income assets with short maturities.

How Does Liquid Funds Actually Work?

The main objective of a liquid fund is to provide capital protection and liquidity to the investors. Therefore, the fund manager selects high-quality debt securities and invests according to the scheme's mandate. Further, it ensures that the average maturity of the portfolio is not more than 91 days.

Shorter maturity makes the fund less prone to changes in interest rates. By matching the maturity of individual securities with the maturity of the portfolio, the fund manager tries to deliver better returns. Liquid funds are known to offer better returns than a regular savings account.

How Should You Invest in a Liquid Mutual Fund?

You can either invest in a mutual fund directly from the company issuing it or through an intermediary. You can use a trustworthy platform like Groww, as well.

Simply download the application from Playstore or App Store. Next, complete the signup and KYC process. Now, you will be able to choose and invest in the mutual funds of your choice.

Why Should You Invest in Liquid Funds

Such funds offer advantages like:

  • Lower Risks

A liquid fund is a low-risk debt investment focusing on principal safety and consistent returns. As a result of this, the value of a liquid fund is relatively steady across market interest rate cycles. Funds owning longer maturity securities, on the other hand, might experience both high capital gains and huge capital losses when interest rates are falling.

  • Flexibility

A liquid fund investor can keep his or her money for as long as necessary. Although there is a minor exit load for redemptions within seven days, liquid funds have flexible holding periods. This allows for simple entry and exit while delivering safe, market-linked returns for the duration of the investment.

  • Fast Redemptions

Requests for redemption are fulfilled within one working day; some funds even provide rapid redemption. Because liquid funds are invested in highly liquid securities with a low default probability, this is conceivable.

Taxation Rules of Liquid Mutual Funds

Dividend income from mutual funds is tax-free for investors. If an investor realizes a capital gain by redeeming the fund's units at a price greater than his or her purchase price, the capital gain is taxable.

Short-term capital gains

If an investor sells or redeems liquid fund units after holding them for up to three years, he or she is considered to have made short-term capital gains. This is taxed at the investor's applicable income tax slab rate.

Long-term Capital Gains Tax

If a liquid fund is redeemed or sold after more than three years, the capital gain is classified as a long-term capital gain. Long-term capital gains are currently subject to a 20% tax rate.

 FAQ

Q1. What is liquid funds meaning?

Liquid mutual funds are debt funds that invest in short-term assets like treasury bills, repurchase agreements, COD, or commercial paper. These funds are only permitted to invest in debt and money market tools with maturities of up to 91 days under SEBI rules.

Q2. Where does a liquid fund invest?

Liquid mutual funds can only invest in listed commercial papers, and their overall exposure to a sector is limited to 20%. They are not allowed to invest in risky assets, as specified by SEBI regulations. These standards are intended to limit credit risk in the liquid fund portfolio.

Q3. Is the Liquid Fund secure?

Liquid Funds are among the most secure mutual funds. This is because they lend to good companies for extremely short periods of time, which decreases risk.

Q4. Is a liquid fund better than a fixed deposit?

Liquid mutual funds have essentially identical returns to short-term FDs. They can, however, be an effective alternative to FDs for two reasons. One, there is no lock-in term to commit to, and two, there is no penalty if you quit after seven days of investment.

Q5. Is there a lock-in time for liquid funds?

No, these funds have no lock-in time. You can use it whenever you want.

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.

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