Liquid funds are a kind of mutual fund scheme. They invest their corpus in financial tools like commercial paper, treasury bills, bank fixed deposits and other debt securities that have maturities up to 90 days.

Since these funds do not come with a lock-in period, the assets which are invested aren't tied up for long. So, liquid funds are usually open-ended debt funds.

A low fee is charged to manage cash in these funds. This is the expense ratio. To date, SEBI has set the upper limit of this ratio to just 2.25%.

Liquid mutual funds are great for those who seek to invest surplus cash for a too short period (say, up to 3 months). The small horizon helps realise the full potential of the underlying securities. Here are 5 other benefits of investing in liquid funds in India.

Superior Returns

Mutual funds come with a track record of providing higher returns compared to bank deposits. Bank deposit rates have gone down steeply in the last ten years. However, liquid funds have been generating 7%-7.5% returns steadily.

Tax Benefits

Liquid mutual funds conform to debt taxation. They have a holding period of 3 years. On redeeming them after that, you can enjoy the benefit of indexation. Your profits reduce when your purchase price goes up. Thus, you can reduce your tax payable.

Low Risk

Liquid funds invest in papers that mature before 91 days. These papers have an AAA rating and come with very low default risk. The government and major public or private companies usually issue them. Therefore, liquid funds are suitable for investors with a low-risk appetite.

High Liquidity

Liquidity is simply how fast you can convert an asset into cash. Liquid mutual funds, as their name suggests, are highly liquid. The redemption from these funds is processed on the very next day of the transaction. Sometimes, you can redeem from the funds within a single too. In this way, liquid funds can also serve as emergency funds. Apart from generating superior returns, these funds allow you to easily take out money to finance any emergency.

Minimum Investment

You can find liquid funds more affordable than bank fixed deposits. You might be required to invest at least ₹5,000 in a fixed deposit. However, you can invest as little as ₹500 through SIP (systematic Investment plan) in liquid funds. Even a lumpsum investment begins at just ₹1,000. Therefore, liquid funds do not burn a hole in your pocket.

Besides the above, there are many other advantages of investing in liquid mutual funds. For example, they also offer:

  • Low-interest rate risk
  • Retail participation in fixed income market
  • Low exit loads
  • Real-time price discovery
  • Low expense ratio
  • Suitability for senior citizens
  • Flexibility
  • Cost-averaging with a systematic transfer plan

Now that you see the various pros of liquid funds, consider investing in them after carrying out the procedure of KYC for mutual funds. This can help establish your customer identity and ensure that the source of the funds is legitimate.