What are liquid funds?
A Liquid fund is a type of debt fund which invests in debt and money market instruments with a maturity of up to 91 days. Leading examples of such short-term investments include call money, government securities, and treasury bills.
Who should invest in liquid funds?
Investors who wish to park their idle money for a short period of time, bearing the least amount of risk, should go for liquid funds. Liquid funds generally give returns higher than savings accounts but similar to fixed deposits. However their returns are less than equity or balanced funds which involve a greater degree of risk.
Cut-off time for liquid funds
The cut-off time for investing in liquid funds is 2 pm for liquid funds. If you invest in a liquid fund before 2 pm, you will be allotted units at the Net Asset Value (NAV) of the previous day. If you invest in a liquid fund after 2 pm, you will be allotted units at the NAV of the same day. You can read more about the cut-off timings of mutual funds here.
Benefits of liquid funds
- Least Risk: Liquid funds carry the least level of risk and are the least volatile among all types of debt mutual funds due to their extremely short maturity period and the fact that these funds mostly invest in instruments with high credit ratings.
- High Liquidity: Liquid funds provide unmatched liquidity to investors since the money remains invested for such a short period of time. Thereby, these funds allow investors to redeem their investments as and when required. On redemption, your proceeds from liquid funds are credited to your account within 1-2 days.
- Instant Redemption: Some liquid funds offer the facility of instant redemption (such as ICICI Liquid Fund). This means that on placing a redemption order online, you immediately get the proceeds in your bank account. However, market regulator SEBI (Securities and Exchange Board of India) has capped the amount of instant redemption to Rs. 50,000 or 90% of portfolio value, whichever is lower. Some mutual funds have linked liquid funds to debit cards such as Reliance Mutual Fund. The Reliance Any Time Money Card allows withdrawals of:
- Up to 50% of the balance in your Reliance Liquid Fund account or
- Up to permissible limit determined by the bank or
- Rs. 50,000 whichever is lower at Visa enabled ATMs.
How are liquid funds taxed?
Being a type of debt fund, liquid funds attract capital gains tax. The rate of taxation depends on the holding period, i.e. the period for which the investor kept his/her money invested in the fund. If the holding period is less than 36 months, the liquid fund attracts a short-term capital gains (STCG) tax and if the holding period is 36 months or more then a long-term capital gains (LTCG) tax is charged on it.
STCG is charged at your slab rate (which could be has high as 30%). LTCG is taxed at the rate of 20% with indexation. Indexation accounts for inflation to reduce your tax liability. You can read more about this, here.
Invest in liquid funds through Paisabazaar.com
Paisabazaar.com is a one-stop solution, where any Indian resident over the age of 18 years can start investing in mutual funds of his/her choice. All that is required is for the prospective investor to sign up for a free investment account and complete the mutual fund eKYC process through Paisabazaar.com. The process is simple and fast allowing investors to get started within minutes. Once the Paisabazaar investment account is up and running, the investor can view and choose from a wide range of liquid funds on offer from leading fund houses in India. Online payment can be completed on the Paisabazaar.com mutual fund platform using the net banking facility of leading public and private sector banks in India. Once the transaction is completed, units will be allotted to the Paisabazaar mutual fund investment account of the investor based on the applicable Net Asset Value (NAV) of the chosen fund.
Top 3 liquid funds
|Investment Instrument||3-Year Return|
|ICICI Prudential Liquid Plan||7.22%|
|Reliance Liquid Fund||7.25%|
|Axis Liquid Fund||7.26%|
1. ICICI Prudential Liquid Plan
ICICI Prudential Mutual Fund AMC’s offering, the ICICI Prudential Liquid Plan is a high performing liquid fund. The fund generated a return of 7.22% over a period of 3 years, outperforming the CCIL T Bill Liquidity Weight Index which generated a return of 4.24% over the same period. (Data as on October 3, 2018; Source: Value Research)
2. Reliance Liquid Fund
Reliance Liquid Fund is managed by the Reliance Mutual Fund AMC. The fund invests primarily in fixed-income debt and money market investments. Over a period of 3 years, the fund generated a return of 7.25%. This fund also outperformed the CCIL T Bill Liquidity Weight Index which generated a return of 4.24% over the same period. (Data as on October 3, 2018; Source: Value Research)
3. Axis Liquid Fund
Axis Mutual Fund AMC offers the Axis Liquid Fund. The fund generated a return of 7.26% over a period of 3 years, outperforming the CCIL T Bill Liquidity Weight Index which generated a return of 4.24% over the same period. (Data as on October 3, 2018; Source: Value Research)