Liquid Mutual Funds

redemption requests for liquid money are fulfilled within 24 hours.

Overall, assessments of liquid funds are moderate. They are the least dangerous of all debt fund classes, as they typically invest in premium fixed-income securities that expire quickly. Thus, these funds are appropriate for risk-averse investors. Liquid funds’ returns are market-linked so they might provide negative returns. However, this is seldom the case because the best liquid funds invest in low-risk, short-term fixed-income assets.

Liquid funds provide much better returns than traditional savings accounts. With excess funds, it is prudent to put the funds in the best liquid funds or top 5 liquid funds to generate higher returns. Risk-averse investors may also consider investing in top liquid funds because the fund primarily invests in high-quality assets.

The best liquid funds match the maturity of their portfolios’ maturity to their holdings’ maturity consistently.

Similarly, according to the recent SEBI standards, liquid funds can only invest in listed commercial papers. These plans may have a total exposure restriction of 25% in each sector. In addition, liquid funds must keep at least 20% of their assets in liquid assets such as cash, money market securities, cash equivalents, etc. These liquid fund schemes strive to provide investors with a high level of liquidity and are regarded as one of the safest mutual fund categories.

One reason is that these schemes have grown in popularity among high-net-worth individuals and high-net-worth investors with short-term excess funds. It is highly advisable to invest in the best liquid funds or the top 5 liquid funds.

The conservative investor can invest in liquid funds as a parking option for their investment due for redemption within the next 3 to 6 months or even less than that.
For people who have excess cash or have lump-sum amounts that they would like to invest in for a short period, liquid funds are ideal.
Liquid funds also serve as an excellent alternative to the savings account, where one can earn higher liquid fund returns at relatively lower risk than other debt instruments.
These funds are ideal for investors who need cash but don’t want to be exposed to market risks.
Liquid funds are also a good choice if you want to try out investing and grow your portfolio before moving on to more significant investments.
As per SEBI regulations, the minimum holding period for liquid funds is 91 days. These mutual fund schemes aim to generate returns by investing in highly liquid fixed income instruments with low risk while maintaining capital stability.

You can redeem your investment anytime without any exit load. Liquid funds returns are ideal for investors with a surplus amount that they do not want to invest in riskier assets.

Easy to Invest – You can only invest in a liquid fund as low as Rs 1000.

High Liquidity – You can redeem your investment within 24 hours, which is excellent for emergencies.

A Variety of Options – Several categories to choose from based on your risk-taking ability.

Better Taxation – The tax structure for liquid mutual funds is similar to saving accounts, i.e., long-term capital gains taxation occurs at 20%

Low risk– Liquid funds returns carry low risk since the investments are made in high-rated short-term instruments.

No lock-in period– There is no lock-in period for liquid funds, making it a preferred option for investors looking for an investment avenue that provides instant liquidity to meet their financial needs.

Investment goals
It is important to note that liquid funds don’t focus on wealth creation but on protecting the capital while generating modest returns. One of the biggest considerations is ensuring your financial goals match the objective of the mutual fund scheme you are interested in.

Risk appetite
As the underlying assets for these funds have a maturity period of up to 91 days, there is little volatility. This makes these funds low-risk investments. However, it does not mean there is no risk at all. Like other debt funds, liquid funds are subject to interest rates and credit risks. Investors must analyze their risk profile carefully before putting money into liquid schemes.

Expense ratio
One of the best ways to find the right liquid fund is by comparing the expense ratio of various schemes. As these funds have similar returns, a scheme with a higher expense ratio will reduce the gains significantly, and one with a lower expense ratio will be profitable for the investor.

Fund’s past performance
The returns generated by liquid funds cannot be predicted because they can vary depending on the interest rates in the market. Therefore, investors must check and compare historical returns of various schemes and choose the one that delivers consistently strong performance. Though past performance does not guarantee future results, it helps assess how well the fund responds to different economic conditions.

Investment plan
If you opt for a direct plan, you can directly invest with an AMC. However, you need a third party like a broker to facilitate the transaction for regular plans. Fund houses, therefore, charge additional brokerage or commission, making regular plans more expensive with a higher expense ratio and lower NAV.

Fund manager
The success of liquid mutual funds depends on the ability and experience of the fund managers. These professionals utilize various techniques to assess risks for different investments and make decisions. A skilled and experienced fund manager is more likely to meet the scheme’s objective.

According to the income tax slab, liquid funds are subject to capital gains tax if you sell the units within three years of buying them.

If you sell after three years, long-term capital gains (LTCG) tax of 20% per cent with indexation benefits will apply. Indexation means adjusting the purchase price of an asset for inflation using the cost inflation index (CII).

If you have redeemed your investment for three years, the total returns will be added to your income and taxed according to the income tax slab rate. After three years, 20% of the interest earned will be taxed at 20% if you have redeemed investments.

The stability of the NAV is directly dependent on the interest rates in the economy. When interest rates rise, the yield on liquid fund investments reduces, which results in a drop in the NAV. When interest rates fall, the yield on liquid fund investments increases the NAV.

When interest rates fall, debt funds have to mark down their portfolio securities to market prices. The extent of this markdown depends on how long each security has until maturity. This results in a negative impact on returns for investors holding these funds and those redeeming their money from these funds.

The primary risk associated with the best liquid funds is credit risk. This means that if an issuer defaults on its debt obligations, it can negatively impact your return from the fund or even lead to capital erosion if you have invested a substantial portion of your corpus into that particular fund or scheme.

Liquid funds diversify your investment across different companies to don’t have all your eggs in one basket.
Since the investments have low maturity periods, the issuer has less risk of default. The NAVs of these funds are not affected by interest rate changes since they only invest in short-term instruments.
Since investments are made in debt instruments with low maturity periods, you can redeem your investment quickly at any time.
Liquid funds are tax-efficient as short-term capital gains on redemption within three years are taxed at the investor’s marginal tax rate. After three years, long-term capital returns are taxed at 20% with indexation benefit.