Liquid fund is debt mutual fund scheme. It invests in debt and in money market instruments. Hence, maturity of liquid fund is equal to or less than 91 days. This helps in risk arising out of interest rate volatility. Also provide high liquidity to portfolio and generate stable income. Thus see top 10 liquid funds. You can see how to open liquid fund account.
What is Liquid Fund?
This type of fund is an open- ended debt scheme. And invest in short term money market instruments. Like treasury bills, short term corporate paper etc. up to 91 days. Here you have option to park one fund for few days or months. Also earn returns for holding period as per market rates.
Also, there is no exit load applicable for such fund. Liquid funds are available in various variants. Such as daily dividend, week or month dividend and growth option. These funds have very high quality and short maturity portfolio. Thus these funds also allow you to redeem any part or entire amount of your investment at day notice.
They are managed by expert fund managers. Who try to manage portfolio based on interest rate movements. While at same time keep portfolio credit worthy. Thus see Features of Money market mutual fund
Are there risks in investing in them?
Liquid funds are as low risk products from liquidity and interest rate risk view. This is because they hold very short term device where chances of interest rate rise and fall are less. Returns on these schemes vary much less compare to other debt funds.
Due to short maturity of investment risk is low. But credit risk is further ease by investment base on estimate of credit basics. Such as sector view, background, quality of management and credit ratings.
Salient features of Liquid Funds
Ease of operation
Once application forms is fill and activate all transactions can be do online. You can transfer funds from your bank account to your liquid fund scheme. When redeemed, money comes back to your bank account.
Flexible investment options
You can park your funds even for day in liquid fund. Unlike an FD where every fresh investment is treat as new FD. Liquid funds are track under single folio. These mutual funds have no lock-in period.
But you can partially redeem from your liquid fund holdings to extent of your need. And allow balance amount to continue earning for you. You can start SIP option in liquid fund scheme. It will like in bank RD. You can choose from growth, dividend payout and dividend reinvestment options.
To benefit you according to tax slab. See Money market mutual fund advantages
Short maturity, Low risk
Liquid funds invest in short-term money-market Instruments with maturity up to 91 days. Thus Liquid fund’s portfolio has average maturity like six or eight days sometimes. Liquid fund can make use of chance in fixed income market to make extra returns. SB accounts cannot do that.
Since instruments have very short tenures. They are not traded in market. And instead held-to-maturity by fund. This removes mark-to-market losses on instruments and eliminates volatility. So liquid fund hold very low risk. Money-market link returns. Best liquid funds have high return. Such as 7.5% to 8% on an average in past 1-year period
Option to be Tax-efficient
In current taxation, you can choose different options based on your tax bracket. And stand to gain more from your investment in Liquid Funds, as below.
If you are in 10% & 20% tax slab, opt for growth option.
If you are in 30% slab, opt for daily dividend reinvestment option.
In core, Liquid fund does not replace your savings account deposit, it complement it. It allows for length of flexibility, tax-efficiency and an alternate avenue. To earn better returns on your unutilized cash without give and take too much on liquidity.
Finally, see top 5 liquid funds. And check liquid fund vs. fixed deposit. So you can also see liquid fund tax implication. For more details see liquid fund tax calculator. Thus you can check liquid funds vs. debt funds.