Liquid Funds
The Next Step Towards Efficient Savings
What are Liquid Funds?
Liquid funds are the mutual funds that invest in fixed income securities of short-term maturity
and low-risk factor.
These funds are ideal to park the surplus cash for short term.
Liquid mutual funds are better alternative of regular bank deposits as they provide higher returns
and offer high liquidity.
Features of Liquid Funds
Short Term Capital Gains
Lower Expenses
Low Risk
Withdraw Anytime
Where Does Liquid Funds Invest?
Liquid funds invest in debt securities which have maturity tenure of less than 91 days.
Liquid fund is considered as the safest category of mutual funds.
The securities chosen have higher credit ratings and low rate sensitivity.
The types of securities chosen by fund managers of liquid fund are:
1.
Certificate of Deposits (CDs)
2.
Commercial Papers
3.
Term Deposits
4.
Call Money
5.
Treasury Bills
6.
Government Securities
Comparison with Bank Deposits
Parameters
Savings Account
Fixed Deposit
Liquid Funds
Returns
4%
5-7%
7.5-9%
Withdrawal
Can be done anytime
Can only be done after
maturity tenure
Can be done anytime
Investment Mode
Cash deposit, account
transfer
Cash deposit
SIP, lump sum (online and
offline)
Taxation
Exempted upto Rs 10,000
Taxed as per tax slabs
Taxed as per STCG and LTCG
Risk
low
low
low
Comparison with Example
Let's take an example of two individuals, say Lakshman and Sanjay who invested Rs 10 lac each for 3 years.
Lakshman deposited Rs 10 lac in bank deposits while Sanjay deposited the same in liquid funds.
The wealth gains of both the investments can be observed from the table below.
Lakshman
Sanjay
Investments (Rs)
10,00,000
10,00,000
Platform
Bank Deposit
Liquid Fund
Investment Tenure
3 years
3 years
Returns
4%
8%
Value After 3 Years (Rs)
11,24,863
12,59,710
Wealth Gain (Rs)
1,24,863
2,59,710
Disclaimer: All the calculations in the above example is done without considering inflation and tax deductions.
From the example, it can be observed that for the same amount of investme