Liquid funds are a type of mutual fund that invests in short-term, low-risk debt instruments such as Treasury bills, certificates of deposit, commercial papers, and money market instruments. These funds have a maturity period of up to 91 days, which makes them a low-risk investment option for investors who are looking to park their surplus funds for a short duration.
Liquid funds are an ideal investment option for investors who want to earn a return on their surplus cash without compromising on liquidity. The units of liquid funds can be easily bought and sold, just like any other mutual fund, without any exit load or penalty. Moreover, the returns on liquid funds are generally higher than in a savings account or a fixed deposit.
Key Advantages Of Liquid FundsÂ
One of the key advantages of liquid funds is that they offer higher returns than a savings account or a fixed deposit. Liquid funds can offer a return of around 4% to 6% per annum, which is higher than the interest rate offered by most savings accounts and fixed deposits. Moreover, unlike a fixed deposit, there is no penalty for premature withdrawal.
Another advantage of liquid funds is that they provide better liquidity than a fixed deposit. Investors can withdraw their money from a liquid fund at any time, and the funds will be credited to their bank account within 24 hours. This is particularly useful for investors who have surplus funds that they might need shortly.
One of the key benefits of investing in liquid funds is the ease of investment and redemption. Investors can invest in liquid funds with as little as Rs. 1,000 and can redeem their investment at any time without any exit load or penalty. Moreover, the funds are credited to the investor’s bank account within 24 hours of placing a redemption request.
Another advantage of liquid funds is tax efficiency. Liquid funds are treated as debt funds for tax purposes, which means that if an investor holds the units for more than three years, the gains are taxed at 20% with an indexation benefit. However, if an investor redeems the units within three years, the gains are taxed as per the income tax slab of the investor, which could be higher.
Final ConclusionÂ
In conclusion, liquid funds are an ideal investment option for investors who want to earn a return on their surplus cash without compromising on liquidity. They offer better returns than a savings account or a fixed deposit and provide better liquidity than a fixed deposit. However, investors should carefully evaluate the credit risk associated with the debt instruments that the fund invests in and choose a fund that suits their investment objectives and risk appetite.
It is important to note that while liquid funds are a low-risk investment option, they are not completely risk-free. There is a possibility of credit risk if the fund invests in debt instruments that default. Therefore, investors should carefully evaluate the credit quality of the debt instruments that the fund invests in before investing.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
here are some frequently asked questions about liquid funds:
Q.1 What are liquid funds?
Liquid funds are a type of mutual fund that invests in short-term, low-risk debt instruments such as Treasury bills, certificates of deposit, commercial papers, and money market instruments.
Q.2 What is the maturity period of liquid funds?
The maturity period of liquid funds is up to 91 days, which makes them a low-risk investment option for investors who are looking to park their surplus funds for a short duration.
Q.3 What are the benefits of investing in liquid funds?
The benefits of investing in liquid funds include better returns than a savings account or a fixed deposit, better liquidity than a fixed deposit, and tax efficiency. Moreover, liquid funds offer stability and safety of capital as they invest in high-quality debt instruments that have a low credit risk.
Q.4 How much can one invest in liquid funds?
Investors can invest in liquid funds with as little as Rs. 1,000.
Q.5 What is the exit load for liquid funds?
There is no exit load for liquid funds, which means that investors can redeem their investments at any time without any penalty.
Q.6 What is the tax treatment of liquid funds?
Liquid funds are treated as debt funds for tax purposes. If an investor holds the units for more than three years, the gains are taxed at 20% with indexation benefits. However, if an investor redeems the units within three years, the gains are taxed as per the income tax slab of the investor, which could be higher.
Q.7 Are liquid funds risk-free?
Liquid funds are not completely risk-free. There is a possibility of credit risk if the fund invests in debt instruments that default. However, liquid funds are a low-risk investment option, and investors can evaluate the credit quality of the debt instruments that the fund invests in before investing.
Q.8 Can one park surplus funds in liquid funds?
Yes, liquid funds are an ideal investment option for investors who want to earn a return on their surplus cash without compromising on liquidity. Investors can park their money in liquid funds for a few days or weeks, which is not possible in a fixed deposit or a savings account.
