Are you looking for an investment for less than a year? Then liquid mutual funds might be the right solution for you.
What are liquid mutual funds?
Liquid Mutual Funds are a type of debt mutual funds which has a short period of investment. It focuses on areas with high credit rating. Liquid mutual funds mature generally in 10 days or goes up to even 3 months. The treasury bill, commercial papers, certificate of deposit are all examples of liquid mutual funds. As it invests in government securities it has a low risk factor.
Liquid funds are open-ended schemes that invest in securities with maturities of up to 91 days. They allow the investors to park their funds for a small amount of time which can be used at any point of time. Since they earn returns from market instruments it may be affected by the rise and fall of the market.
There are many liquid funds in India that give an indication of the returns generated in the past few years.
Features of Liquid Mutual funds
Tax Benefits of Liquid mutual funds
Did you know that savings account balances will need to give tax as per the tax slab? Liquid funds too are taxed at the same rate if held for less than a year. But, you can reduce the impact of the tax on the liquid fund. Here’s how to do it.
Opt for a dividend pay-out if you fall under the 30% tax bracket or daily dividend reinvestment. But, if you are in the low tax bracket then opt for the growth option since the tax is anyway low. The corporate houses take advantage of such schemes.
Advantages of liquid mutual funds
Since 25/10/2011, the interest on Savings Fund accounts has been deregulated by RBI and the banks are now free to decide under certain conditions.
Liquid Mutual Fund Returns
During high inflation, liquid mutual funds are the best investment instruments available to the individual. RBI keeps a high-interest rate and tightens the liquidity. This, in turn, provides good returns on the liquid mutual funds.
No Lock in Period
The liquid funds have no lock-in period and can be withdrawn within 24 hours on request. The cut off time of the withdrawal is 2 PM. If one attempts to withdraw after that, it is processed by 10 AM the next day. The liquid funds have no entry and exit loads.
The risks are lower as compared to other mutual funds as the maturity period is 91 days. Some even have a maturity period of one week. As the time is short they are not traded on the market. This removes market to market loss on the instruments and eliminates volatility.
Disadvantages of Liquid mutual funds
One major disadvantage of Liquid mutual funds is the low return on investment. It yields no investment return aside from standard rate of inflation over time.
Why invest in liquid mutual funds?
The Liquid mutual funds provide good liquidity and low-interest rate risk. The Liquid mutual funds have the restriction of 10% or less market to the market component. It is the best parking option for corporates. For all these reasons, Liquid mutual funds are considered as a good alternative for short-term fixed deposit. The minimum investment option varies from Rs. 25,000 to Rs. 1 lakh. Most schemes have a lock in period of 3 days to protect against primary glitches and offers redemption proceeds within 24 hours.
So now that you know what are liquid mutual funds and their advantages and disadvantages, you can easily decide if they make the right choice for the financial goal you would like to achieve through mutual fund investment.