Liquid Mutual Funds

If you are an investor looking to park your surplus cash without a longer lock in period? Liquid mutual funds can be an ideal option. These mutual funds offer a balance between safety, liquidity, and returns, making them ideal for short-term financial goals and emergency funds. Whether you want to park idle cash or earn potentially better returns than a regular savings account, Liquid Mutual Funds can help you make the most of your money.

What are Liquid Mutual Funds?

Liquid Mutual Funds fall under the category of debt mutual funds that mainly invest in short-term money market instruments like treasury bills, commercial papers, certificate of deposits, and other debt instruments having a short maturity period.

This kind of fund is structured in a way to deliver high liquidity and lower risks. Because they have an investment in instruments that mature in 91 days only, they are usually not much impacted by changes in interest rates. Liquid Funds are an ideal choice for those investors who wish to invest their funds for some days or months but need their liquidity at any time.

Features of Liquid Mutual Funds

• High Liquidity: One of the main benefits of liquid funds is easy accessibility to money. These funds are easily redeemable by the investors.
• Reduced Risks: The use of short-term debt instruments in Liquid Funds implies low risks associated with interest rate.
• Efficient Use of Excess Money: Investors can park their idle money and generate returns from Liquid Mutual Funds instead of keeping this money in savings accounts.
• Absence of Lock-in Period: Typically, there is no lock-in period attached to most Liquid Mutual Funds, allowing investors to withdraw their money whenever required.
• Ideal for Creating an Emergency Fund: Liquid Funds can be considered as a good investment choice for creating an emergency fund because of their liquidity and stability.

How to Invest in Liquid Mutual Funds?

You can invest in liquid funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable liquid fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why Invest in Liquid Mutual Funds?

• Suitable for Short-Term Objectives: In case you are accumulating cash for some upcoming expenditure like a holiday trip, insurance payment, home repairs, or tuition fees, then Liquid Funds could be a feasible choice for you.
• Emergency Fund Management: Many people keep emergency funds in Liquid Funds since they enable the quick withdrawal of money when needed.
• Alternative to Savings Accounts: Savings accounts offer liquidity but Liquid Funds can give relatively higher returns in certain market conditions.
• Effective Cash Management: Companies as well as individuals use Liquid Funds for managing excess money on a temporary basis.

Taxation of Liquid Mutual Funds

• Taxation of Fresh Investments (Onwards from April 1, 2023): The entire capital gain by selling liquid funds, irrespective of the holding period, would be short-term capital gain. This gain would be fully added to the individual's income and would be liable to Income Tax at the appropriate slab rate. There is no option for indexation.
• Taxes on Legacy Investments (Pre-April 1, 2023): The units held for or less than 24 months, then taxes will be applied according to the investor's individual income tax slab. However, for legacy units held by an individual for a period above 24 months, they will be considered LTCG and subject to a flat tax rate of 12.5%, with no indexation.