Belonging to the debt category of mutual funds, liquid funds are invested in very short-term market instruments like treasury bills, government securities, and call money. These funds are getting popular with retail investors as they give returns that are higher than savings bank returns and offer easy liquidity.
Uses of Liquid Funds
Investors can use these funds to park money for short periods of time—one day to six months. Equity investors can use liquid fund to stagger their investments into equity mutual funds using the systematic transfer plan (STP), as this method could yield higher returns and help overcome volatility over time.
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Expectations and Rises
On submission of a redemption request, the money reaches the bank account on the next working day and thus they can redeem their investments. In the case of liquid fund, there is no entry or exist load by fund houses. As per Value Research data, the category of liquid funds gave a return of 6.94 per cent in 2018–19, which is higher than the 3.5–6 per cent offered by banks on their savings account. These funds are believed to carry the lowest risk as well as the least volatility in mutual funds, as they are generally invested in instruments with high credit rating (P1 +).
Tax Liquid funds bring in long-term capital gains with tax indexation, if held for more than three years. If sold before three years, one has to pay tax as per one’s tax slab. In case of a dividend option, the fund is subject to a dividend distribution tax that amounts to about 29.12 per cent.