Liquid Funds: What are Liquid Mutual Funds in India?

Liquid mutual funds are mutual funds that invest in debt instruments and money market instruments. Liquid funds have a tenure of up to 90 days i.e. nearly three months. However, if you are an investor putting in your money in liquid funds, you need to know that you can only invest up to Rs 10 lakh.

The NAV of the liquid fund is calculated for 365 days, whereas the NAV of other funds is calculated only on the basis of business days.

 

Benefits of liquid Mutual Funds

Here are the key advantages of liquid funds which make them an attractive option for the investors:

Minimal lock-in period - Lock-in periods can range from 3 days to 3 months maximum.  This means that you have access to instant liquidity in case of any emergency. You can sell the units without any hassle without any exit load.

Safe investment option- Liquid funds invest in fixed income debt securities like bonds and debentures. These have a short maturity period and a fixed rate of interest. These funds are not very volatile and perform well irrespective of the market conditions. Liquid mutual funds work very well for investors who do not have a huge risk appetite but want a steady return. Typically, these funds offer 8% returns.

Instant withdrawals - When you redeem a liquid mutual fund, you can withdraw the redemption amount within 24 hours

Tax-efficient - liquid mutual funds also offer tax benefits making it a lucrative option for most investors.

 

How liquid Fund works

The objective of liquid funds is to provide the investor with a high level of liquidity and capital security.  These funds are of low risk and offer higher returns. The fund manager ensures that the investment is done in high-credit quality debt instruments. This reduces the sensitivity of returns to changes in interest rates. Additionally, the value of the underlying securities is linked to the value of the portfolio. This is helpful in generating higher yields. Another interesting feature of these mutual funds is that the underlying assets of the fund have a lower maturity period. This is helpful for the fund manager when sudden redemption requests have to be complied with.

The minimal lock-in period of liquid mutual funds is helpful for investors. It allows the investor to make withdrawals of the proceeds within 24 hours of redeeming the unit.

One of the characteristic features of liquid funds is that the underlying assets of the fund have a lower maturity period which can be helpful for the fund manager in times when redemption demands have to be met. Liquid mutual funds are a great investment option if the investor wants to invest surplus funds. It instils a financial discipline of keeping your extra money invested at all times to generate returns.  These schemes offer higher returns compared to a savings account. Furthermore, at the time of exiting the mutual funds, the investor does not have to pay any exit load.

 

How to invest in liquid Mutual Funds

Investors can invest directly or contact the agents and distributors of mutual funds for necessary information and application forms. Investors must ensure that they invest through the Association of Mutual Funds in India (AMFI) registered distributors and that the distributor has a valid AMFI Registration Number (ARN).

For investments through the direct plan, the investor needs a financial adviser but does not have to pay any commissions to the distributors. This maximizes the returns from the liquid mutual funds. If the investment is done through a distributor, they are required to disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds out of which the scheme is being recommended to the investor.

Investors also have the option to invest directly with the mutual fund either by visiting the mutual fund branch or online through mutual fund website. Forms can be deposited with mutual funds through the agents and distributors who provide such services.

Before making an investment, the investor should take into account the track record of the mutual fund/scheme. Investors should also refer to the product labeling of the scheme. As per SEBI regulations, all the mutual funds are required to label their schemes on the following parameters:

a)  Nature of scheme – whether the aim is to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term)

b)  A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (equity/debt)

c)   Level of risk depicted by a pictorial meter as under:

• Low - principal at low risk
• Moderately Low - principal at moderately low risk
• Moderate - principal at moderate risk
• Moderately High - principal at moderately high risk
• High - principal at high risk

Product labeling should be disclosed in:

a. Front page of initial offering application forms, Key Information Memorandum (KIM) and Scheme Information Documents (SIDs).

b. Common application form – along with the information about the scheme.

c. Scheme advertisements.

 

Top Liquid Mutual Funds in India

Liquid Fund Calculator

The investment decision is often guided by the returns given by a liquid mutual fund. It is easy to calculate the amount using a liquid fund calculator. This is available on the website of online mutual fund aggregators as well as the website of mutual fund schemes. To use the calculator, you need to provide the following details:

Fund house you are opting for

The type of scheme

Investment amount

Period of investment

Once you enter these details, the calculator will show you the expected returns from a particular liquid mutual fund. You can also use the calculator to compare various plans before making a decision.

Is liquid mutual fund taxable?

If the liquid fund is held for a period of more than 3 years, the sale will attract long term capital gains tax. You will have the benefit of indexation. The present rate is 20%. If the liquid fund is sold within three years, it will attract short term capital gains tax. The tax rate will be determined on the basis of the income slab corresponding to the investor.

In case the investor opts for a dividend option in a liquid fund, a dividend distribution tax will be payable by the company declaring the dividend. The present rate is 29.12%.

 

FAQs

 

Can mutual fund NAV history give me a better sense of the performance of a particular scheme?

Yes, it can give you an idea about how the scheme has been performing and how long the scheme has been around. But be mindful that NAV is dependent on the changes in the underlying asset and cannot serve as your only guide to evaluate a scheme.

 

What is the difference between the NAV of a mutual fund and share price?

The share price represents the value of equity of a company as quoted on the stock exchange. The demand-supply and company’s projected performance has a bearing on the share price. This is why the market value and book value of shares matter. Book value represents the value of the company according to its balance sheet. On the other hand, market value is the value of a stock or a bond, based on the traded prices in the financial markets. That’s why the stock market price of a share is different from its book value.

However, in the case of a mutual fund, there is no market value for the mutual fund unit. Therefore, if the units of a mutual fund are purchased at its NAV, it is similar to purchasing it at its book value.

 

Do any liquid mutual funds provide guaranteed returns?

There are no guaranteed returns for any mutual fund investments. All mutual fund investments are subject to market risk. Therefore, it is important to read the offer document thoroughly to understand the risks of a mutual fund scheme.

 

Is there a time limit within which the proceeds of redemption of liquid funds are credited to the investor’s account?

Yes, it is usually done within 24 hours. In case of failure to credit the amount within the stipulated time period, the fund house is liable to pay interest as specified by SEBI from time to time for the period of delay. The delayed interest is 15% at present.