Liquid funds are debt mutual funds. They invest their corpus in short-term financial tools like commercial paper, government securities, certificates of deposits and treasury bills. The residual maturity is up to 91 days allowing the investors to park money for short spans and fetching better returns. For instance, it can be anywhere between 1 to 3 months. Investors are allowed to redeem the units in the form of cash at any time without any exit load. This makes them better than FD which charges a premature withdrawal fee.
One of the top liquid funds’ benefits is that they are less risky and volatile due to being government securities. This makes them ideal for investors with a low-risk appetite. Below are a few other benefits to make an informed choice.
Ø No Lock-In Period
There is a low or no lock-in period for liquid funds. So, your assets are not tied up for a long time with strict investment plans. There are no restrictions on selling your units. You can withdraw the money within about 24 hours of a business day. The redemption request will be processed by 2 pm. The next withdrawal will be by 10 am the next day.
Ø Tax Benefits
Liquid mutual funds offer tax-adjusted returns. This means investors can get indexation benefits that help you adjust the purchase price to inflation. Long-term capital gains on debt funds and liquid funds will be taxed at 20% after factoring in the impact of indexation. It helps to reduce the overall effect of long-term debt funds.
Ø Low Risk
Liquid funds come with a small investment period. So, the risk associated with liquid funds is low since there is no risk of credit rating fluctuations impacting money. Further, they invest in AAA-rated papers which mature in the next 91 days. So, they are hardly affected by interest rate changes and have minimum chances of default. Because of their low-risk level, they have been given a blue colour as per the codes specified by the Securities and Exchange Board of India.
Ø High Returns Amid Inflation
In the last 1 year as of 2021, liquid funds generated higher returns (in the range of 7-9%) when compared to FDs. They also generally have a better return rate than current accounts and savings bank accounts. Liquid funds are an ideal choice when it comes to inflation. The RBI keeps a higher interest rate and tightens the liquidity. So, investors can gain better liquid fund returns. Now you can easily fulfil your investment objectives for the chosen period.
Pick from dividend plans, daily dividend plans, growth plans and weekly plans. You can learn about each and choose the one that suits your liquidity plans. But know that a cost fee will be levied to manage the liquid fund money. This is known as the expense ratio which is now fixed at 2.25% by SEBI.
Multiple liquid fund benefits make it an ideal choice for investors. It is helpful for anyone who wants to invest surplus cash for a short horizon and generate superior returns than a typical bank savings account.