Explained: What Are Liquid Mutual Funds?

by Asha Ritu

We sometimes come into possession of surplus funds either in the form of a bonus or a cash gift, which must be invested. But fixed deposits are not an option as they have a lock in period which cuts off access to the cash. In such a situation, a liquid fund can become one of the most beneficial investment options. Unlike savings deposits which provide only minimal interest, liquid funds will allow you to earn better interest on your invested capital.

What are Liquid Mutual Funds?

Liquid Mutual Funds are a type of debt mutual funds which have a short period of investment. They are open-ended schemes that allow you to park your funds for a small amount of time.

Due to this, liquid funds are a good alternative to fixed deposits. Liquid Funds typically witness steady growth and provide an easy exit to investors in the form of instant redemption as and when they need access to their money. This makes it an ideal product for investors who have short term surplus in their savings accounts.

Who Can Invest in Liquid Funds?

Since Liquid Mutual Funds provide high returns, it is advised that investors looking to park their idle money should consider liquid funds as a viable option. Ideally, they should be utilized to achieve your short-term goals. Since some funds generate around 8% to 9% returns, they should surely be preferred over savings accounts and fixed deposits which provide 4% to 6% returns.

When Should Liquid Funds Investment be Made?

If you want to make an investment for a short time period, it is better to invest your money in liquid funds as they invest in instruments up to a maturity of 91 days. You can invest your money for short periods ranging from 1 day to 3 months.

Are Liquid Funds Investments Tax-Free?

When it comes to liquid funds, the dividend income is tax-free in the hands of the investors. For the growth option, the taxes are dependent on whether you’re investing for long-term or short-term.

What are the Benefits of Liquid Funds?

  • Out of all debt funds, liquid funds give permanent returns.
  • Return on investment is around 6-8%, which is greater than fixed deposits.
  • Easy Liquidity, you can withdraw your money within 24 hours.
  • The earnings (returns) generated through dividends are non-taxable.
  • Liquid fund investments are considered less volatile as they’re invested in instruments with high credit rating, and hence offer low risk.
  • Investors start earning returns from the date of investment itself thus minimizing any return leakage.
  • No entry and exit loads.

If you’re looking for the best performing liquid funds to invest in, check out - Best Liquid Funds 2020 : Top 10 Liquid Funds

Happy Investing!