Kolkata, February 9: A liquid fund is a mutual fund that invests in short-term debt and money market instruments that generate fixed interest. These could be treasury bills, commercial papers, and so on. These instruments have a maximum maturity period of 91 days.
Returns on liquid funds are not guaranteed, but they have been known to give returns in the range of 7-9 per cent. They have a very low interest rate risk because they are highly liquid. Liquid funds tend to perform well irrespective of how he markets are performing. You can invest in both in a growth and dividend option.
For this reason liquid funds are a better option to park their money compared to savings bank accounts which give 4 per cent returns. Also, as the name suggests, liquid funds are liquid so you get the money quickly after you submit a request for redemption. The redemption time is 24 hours on business days. Unlike FDs, there is no penalty when you redeem a liquid fund. So you do not have to pay any exit load. When it comes to taxes, if you sell a liquid fund before three years, you have to pay taxes according to your tax slab.
It is recommended that you park your emergency fund in a liquid fund, because they provide higher returns than savings deposits in a bank and also because they are liquid. You should let excess funds lie idle in a savings bank account. So, when there is a substantial amount of money lying in your savings bank account, you should invest it in a liquid fund. Let us say that in two months you have to pay Rs 1,00,000 as your daughter’s annual fees. It is very risky to invest such money into stock markets or equity mutual funds. In such cases it is best to invest the money into a liquid fund. When you want to park short term funds for a purpose like a wedding, vacation or home renovation, liquid funds are for you. Liquid fund\s are an ideal place to park your funds for a period of 1-3 months.
Liquid funds can also be used to direct your investment in equity mutual funds. You can opt for a systematic transfer of funds to your equity fund from your liquid fund. This way, whenever you have additional funds, you can make your money work harder.
You can invest through filling up an application form and issuing a cheque for the amount you want to invest. You can do this through a mutual fund agent or a distributor. You can also invest online directly through websites of mutual funds or mutual fund platforms. It is important to ensure that the mutual fund distributor is registered with Association of Mutual Funds (AMFI).
To invest, you need to have your KYC in place. For this you would need to submit documents like address proof and identity proof.
When investing in liquid funds select a scheme that has a low expenses ratio and a track record over a period of time. While past returns need to be looked at, it is important to choose a reputable fund house. You also need to look at the portfolio of the fund and credit ratings of a fund by rating agencies .