Liquid Funds
Embedded Files
Liquid funds are debt funds in the first place, investing in debt instruments of high quality with a good credit rating. Examples of such funds are certificates of deposit, Treasury bills, and commercial papers.
HOW DO LIQUID FUND WORK?
To understand how liquid funds work, you need to know where they invest and how they generate returns
Where do Liquid Funds Invest: A liquid fund will usually invest in short-term, highly liquid securities with good credit. The maximum sector exposure for liquid funds is 20% overall, and they are only permitted to engage in listed commercial papers. They cannot engage in risky assets as those terms are defined by SEBI regulations. These standards are designed to limit financial risk in the portfolio of liquid funds. Additionally, at least 20% of the assets of liquid funds must be in liquid goods (cash and cash equivalents such as money market securities). This ensures that they can quickly meet any redemption demands.
Sources of Earnings: Liquid funds earn mainly through interest payments on their debt holdings; a very small part of their income is generated via capital gains. A liquid fund's market value does not change significantly when market interest rates change because it only invests in short-term securities. Thus, there are no sizable capital profits or deficits for liquid funds. Liquid funds frequently outperform other debt funds in an atmosphere of rising interest rates because (i) their interest earnings are increasing and (ii) the impact of capital losses on their market values is minimal. According to market speak, liquid funds have a very minimal interest rate risk.
Advantages of Liquid Funds
Low cost
Low Risk
Flexible holding period
Quick Redemption
Who should invest in Liquid Funds?
Investors with a short investment horizon
Investors who invest in bank deposits
Investors who want to keep Contingency Funds
Investors who need to Park Funds Temporarily
Medium to Route investments in Equity Funds
Taxability of Liquid Funds
Taxability of Liquid Funds
The dividends offered by liquid funds, if any, will be added to your overall income and taxed as per the income tax slab you fall under. The capital gains provided by liquid funds are taxed according to the same regulations as those provided by debt funds.
When you redeem your investment within three years of the date of allocation, you realize short-term capital gains. After three years, you sell your debt fund units for long-term capital gains. After indexation, these gains are subject to a 20% tax rate.
FAQs (click here)
Q. What are Liquid Funds?
A. High liquidity investments for debt and money market securities are known as liquid funds. The Maturity period for these funds is 91-days. These mutual funds are the safest of all the others. Saving money for emergencies can be deposited in liquid funds. You can put money in liquid funds for a short amount of time and then withdraw it as needed.
Q. Do liquid funds have a lock‐in period?
A. No. You can redeem anytime you want. There is no lock‐in period in liquid funds.
Q. Do liquid funds have an exit load?
A. Yes, but only if you redeem within seven days of investing. After that, you don't have to pay any exit load.
Q. Do Liquid Funds provide guaranteed returns?
A. Liquid Funds don't offer returns that are guaranteed. However, because of the makeup of their portfolios, they do offer fairly stable returns. At this time, annualised returns from liquid funds are expected to fall between 6% and 7%.
Q. Can we start SIP in liquid funds?
A. Yes. You can start a SIP in a liquid fund. You can pick how frequently you want to invest, and money will get auto‐deducted from your account and invested.
Q. Is Liquid Fund Safe?
A. As Liquid Funds lend to good companies for an extremely short duration and reduce the risk they are considered as safest mutual funds. The risk of losing money is almost zero if you stay invested for some amount of time.
Q. Are liquid funds taxable?
A. Yes, Liquid funds are taxable. If the liquid fund investment is held for more than 3 years, it is subjected to long term capital gains which is taxable at 20% with indexation.
Page updated
Google Sites
Report abuse