LIQUID FUNDS

Liquid fund is a category of mutual fund which invests primarily in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits. Lower maturity period of these underlying assets helps a fund manager in meeting the redemption demand from investors.

Benefits of liquid funds

Withdrawals from liquid funds are processed within 24 hours on business days. The cut-off time on withdrawal is generally 2 p.m. on business days. It means if you place a redemption request by 2 p.m. on a business day, then the funds will be credited to your bank account on the next business day by 10 a.m.

Liquid funds have the lowest interest rate risk among debt funds as they primarily invest in fixed income securities with short maturity.

These mutual funds have no lock-in period. Liquid funds have no entry load and exit loads.

Returns from liquid funds

Liquid funds are among the best investment options for the short term during a high inflation environment. During high inflationary period, the Reserve Bank typically keeps interest rates high and tightens liquidity, helping liquid funds to earn good returns.

During the past year, some liquid funds have even offered higher returns than bank fixed deposits, which levy a penalty on premature withdrawal. ( Opr. average return 9.00% to 9.75% )

Still, we keep our spare cash in these low-yielding savings accounts, earning much lower rates than the inflation rate.

Different plans

Liquid funds come with different plans like growth plans, daily dividend plan, weekly dividend plans and monthly dividend plans. Growth plans don't declare any dividend, and appreciation of fund is reflected in higher unit value.

Taxation

Dividends received under liquid plans are not taxed at the hands of resident individual investors but fund houses pay dividend distribution tax @28.325 per cent (including surcharge and Cess).Individual investors who books gains before a year on their investment in liquid funds are taxed at the same rate as per their income slabs. Interest earned from savings accounts are also taxed at this same rate.

If investors redeem liquid fund units after a year, they have to pay a long-term capital gains tax of 11.33 per cent (including cess and surcharge) or 22.66 per cent with indexation benefit, whichever is lower. This helps in reducing tax outgo for those in higher income tax slabs. Earnings from savings accounts or banks fixed deposits are clubbed to one's income and are taxed at respective slabs.