Liquid Mutual Funds

Liquid mutual funds are open-ended debt funds that invest in short-term instruments such as treasury bills, commercial papers, certificates of deposit and other money market instruments with a maturity of up to 91 days only. Because of their short maturity, they generally have lower interest-rate sensitivity than debt funds investing in longer-term securities. 

Liquid funds usually consider parking surplus cash for short-term, especially if you don’t want to keep money idle in your savings account. However, they are not risk-free. Returns can fluctuate and investors are exposed to risks such as credit and liquidity risk.

A liquid fund is a specific type of mutual fund in itself; therefore, unlike equity funds, they are not categorized into various sub-types. However, they may differ based on their portfolios and investment strategies.

• Conservative Liquid Funds: These primarily invest in high-quality, short-term instruments with low credit risk.
• Diversified Liquid Funds: These funds invest in a variety of eligible short-term securities and issuers to diversify the portfolio risk.
• Institution-focused Liquid Funds: Some liquid funds may have a very high proportion of institutional or corporate investors and such concentration can impact the fund's cash flow and portfolio management.

In a liquid mutual fund, the fund manager invests your money along with thousands of other investors in such money market instruments which have a residual maturity of up to 91 days. The fund manager needs to hold at least 20% of its net assets in liquid assets such as Cash, Government Securities, T-bills and Repo on Government Securities.  

The fund earns income through interest and gains from these securities, which contribute to the fund's NAV. When you need money, you can redeem your units, providing quick access to your money. However if you redeem the units within 7 days of your investment, an exit load will be levied whereas after 7 days there is zero exit fee. 

Liquid funds generally have high liquidity, but the redemption proceeds are subject to the fund's applicable redemption and processing rules.

To invest in liquid mutual funds through Paisabzaar app, follow the simple steps below: 

1. Open the Paisabazaar account on your mobile. 
2. Click on ‘Mutual Funds’ under ‘Investment Products’. 
3. Tap on ‘View All’ then Category under three dots to find out liquid funds. 
4. Out of many options choose one ‘Liquid Fund’ that suits your investment horizon and risk appetite. 
5. Complete KYC to start your SIP or One-time investment journey.

Liquid funds are debt mutual funds, and their taxation depends on when the units were acquired and the applicable tax rules.

• Investment on or after 1 April 2023- Gains from specified debt-oriented mutual funds covered by Section 50AA are generally treated as short-term capital gains, irrespective of the holding period. These gains are taxed at the investor's applicable income tax slab rate.
• Investment before 1 April 2023- The tax treatment depends on the holding period. If investment holds for 36 months or less, treated as short term capital gain and taxed as per your income tax slab. Holding funds more than 36 months are considered as Long-Term Capital Gain (LTCG) and taxed at 20% with indexation.  

If you choose the IDCW (Income Distribution cum Capital Withdrawal) option, the payout is taxable as per your applicable income tax slab. If the applicable threshold (Rs 10,000 in a financial year) is crossed, TDS of 10% may also apply.