COMPLETE GUIDE TO LIQUID FUNDS (2024)

Priya Jain
- Dec 28, 2023
- 3 min read

What are Liquid Funds?

Liquid Fund is a category of mutual fund that invest in debt and money market instruments (such as Treasury bills, Commercial Papers, Certificate of Deposits and so on). The objective of liquid funds is to provide financial protection as well as high liquidity (degree by which an asset or investor can be easily converted into cash) to the investors.

Features of Liquid Funds

1. Investment Horizon: Liquid Funds make short-term investments with the maturity period of up to 91 days.

2. Fixed Returns: Since liquid funds invest in debt and money market instruments, the return on investment is fixed. Once the investment matures, investor gets the principal amount as well as fixed interest.

3. Risk Involved: Liquid Funds consist of low risk due to short time span makes them less vulnerable to interest rate fluctuations.

4. Expense Ratio: Liquid funds are low-cost funds as they are not actively managed by the fund manager. Most liquid funds have expense ratio below one percent.

5. Quick Redemption: Redemption in liquid fund is quick and easy. Some funds offer an instant redemption facility whereas some funds process the redemption request within one working day.

6. Exit Load: SEBI announces exit load structure on liquid funds in order to protect the interest of fund houses as well as retail investors. SEBI has announced exit load for redeeming the investment within 7 days of subscription. After 7 days, there is no exit load on redemption.

Day of Investor Exit	Exit Load (as % of Redemption Price)
Day 1	0.0070%
Day 2	0.0065%
Day 3	0.0060%
Day 4	0.0055%
Day 5	0.0050%
Day 6	0.0045%
Day 7 Onwards	0.0000%

For example, an investor invested Rs 5 lacs in Liquid Fund and redeems the fund on day 3 due to some emergency, now the investor needs to pay exit load of Rs 30 (500000*0.0060%) for redeeming the funds early.

7. Taxation: Investor need to pay tax on Capital Gains from Liquid Funds. Short term capital gain (holding period of up to 3 years) is taxable at slab rate whereas Long term capital gain is taxable at a flat rate of 20% after indexation.

Liquid Funds VS Fixed Deposit

Basis of Difference	Liquid Funds	Fixed Deposits
Investment Horizon	Short-Term up to 91 days	Short-Term to Long-Term ranging from 7 days to 10 years
Interest Rate Risk	Liquid Funds are less susceptible to Interest Rate Risk	Fixed Deposits are more susceptible to interest rate risk. If interest rates rise, existing Fixed Deposit may offer relatively lower return (i.e. lower rate compared to the new rate)
Return	Liquid Funds do not offer any guaranteed returns. However, liquid funds provide better returns than Fixed Deposits.	Fixed Rate of Return which is governed by Reserve Bank of India.
Liquidity	Liquid Funds offer high liquidity to the investors. However, exit load is applicable for withdrawing funds within 7 days.	The interest rate offered on Fixed Deposit is based on the investment horizon, therefore, investor can prematurely withdraw but a penalty will be levied for the same.
Diversification	Liquid Funds offers variety of debt and money market instruments which results in diversification of investment.	Fixed Deposit does not offer any such diversification.
Tax Liability	Return from Liquid funds is taxable under the head Income from Capital Gain. Short Term Capital Gains are taxable at slab rate whereas Long Term Capital Gains are taxable at 20% with indexation.	Return from Fixed Deposit is taxable under the head Income from Other Sources at slab rate
Systematic Withdrawals	Liquid funds provide the option of systematic withdrawals i.e., investor can withdraw a predetermined amount at regular intervals.	Fixed Deposits do not offer any such option and induce the withdrawal of entire amount at maturity. FD pre-matured withdrawal attract penalties from Bank.

When to invest in Liquid Funds?

An investor should consider liquid funds if:

1. Investor wishes to invest in a systematic transfer plan to other fund such as equity fund, liquid funds can be used as stepping stone and investor will benefit from Rupee Cost Averaging

2. Investor aims to generate an Income stream; lump sum can be invested in liquid fund and systematic withdrawal feature can be used for receiving periodic income.

3. Idle or excess cash is available for a short period as liquid funds will yield better return at low risk as compared to saving accounts

4. The investor has short investment horizon and wishes to achieve a short-term financial goal using the investment

5. Investor aims to create an emergency or contingency fund. In this case, liquid funds are one of the most appropriate options as they provide liquidity and safety while generating a return (low).

Top Liquid Funds for Investment (Based pn 1-Year Return)

Scheme Name	2 W	1 M	2 M	3 M	6 M	1 Y	2 Y	3 Y	Exps Ratio
Navi Liquid Fund Reg (G)	6.56	6.63	6.65	6.64	6.65	6.79	5.88	5.04	0.20
Bank of India Liquid Fund-Reg(G)	6.87	6.93	6.97	6.94	6.91	7.04	5.92	5.02	0.13
Baroda BNP Paribas Liquid Fund-Reg (G)	6.65	6.71	6.79	6.79	6.80	6.99	5.88	5.02	0.31
Mahindra Manulife Liquid Fund-Reg (G)	6.87	6.90	6.93	6.89	6.90	7.03	5.89	5.02	0.26
axis Liquid Fund-Reg(G)	6.79	6.84	6.90	6.89	6.86	7.04	5.89	5.01	0.24
Mirae Asset Liquid Fund-Reg(G)	6.77	6.81	6.86	6.85	6.84	6.99	5.85	4.99	0.23
Aditya Birla SL Liquid Fund (G)	6.77	6.81	6.86	6.84	6.81	7.04	5.87	4.99	0.34
Canara Rob Liquid Fund-Reg (G)	6.72	6.80	6.88	6.87	6.85	7.03	5.88	4.98	0.18
JM Liquid Fund (G)	6.76	6.84	6.87	6.86	6.84	7.00	5.86	4.98	0.22

For a detailed analysis of returns offered by various mutual fund schemes visit the The Number News prepared MF-Report Card at https://www.thenumbernews.com/mf-corner.

An investor needs to consider various factors such as risk, return, expense ratio, investment horizon and investment objective while investing and ensure that these factors are aligned with the offerings of liquid funds.

For other interesting conceptual topics please visit our other contents:

Sectoral Funds: https://www.thenumbernews.com/post/sectoral-funds

What is Index Fund and Index Fund VS Active Funds: https://www.thenumbernews.com/post/index-funds-vs-active-funds

Mutual Fund and its types: https://www.thenumbernews.com/post/mutual-funds-its-types

COMPLETE GUIDE TO LIQUID FUNDS (2024)

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