What are Liquid Funds?

What are Liquid Funds?
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Investors looking for a quick redemption of funds along with reasonable returns need not look beyond Liquid Funds.

A liquid fund is a debt mutual fund which invests in instruments like Certificate of deposits, treasury bills and commercial papers etc. Since all the underlying securities have a lower maturity period, it is easy for a fund manager to meet redemption demands of investors.

Despite having reasonable returns, liquid funds are not very popular with the masses. Hence, let’s look at the benefits of liquid funds: 

No lock-in period

Unlike other mutual funds, liquid funds generally have no lock-in period so requests for withdrawals can generally be within 24 hours on business days.

No exit or entry load

As there is generally no exit or entry load, the expenses incurred by an investor are considerably lesser than other mutual fund investments. 

Low interest rate risk

Since liquid funds primarily invest in fixed income securities with lower maturity, they stand at minimal risk.

Taxation of Liquid funds

Since funds pay dividend distribution tax (DDT), dividends received by individual investors are tax-free.

Here are other things to keep in mind:

Liquid funds are not subject to TDS (tax deducted at source). Gains from liquid funds held for less than 36 months are taxed as per your Income slab. Gains from funds held for more than 36 months are taxed at 20% with indexation.

Investors in the 30% slab, who plan to sell within a period less than three years, can opt for dividend* reinvestment as dividend distribution tax (DDT) is generally lower than their tax slab.

Past performance should not be your only criteria for evaluation, look for a track record of the fund manager. Also, the size of the fund should be given due importance. If you would like to analyse the performance of funds before you invest, look for a comparison against the fund’s benchmark.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

*Dividends are subject to availability of distributable surplus and approval of Trustees. It should be noted that pursuant to payment of dividend, the NAV of the plan/dividend option of the Scheme would fall to the extent of dividend payout and statutory levy, if any.

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