Liquid Mutual Funds
Insights of Liquid Mutual Funds:
This is a type of debt mutual funds which primarily invests in money market instruments for a very short period say even one day. As, the name suggests this funds are more liquid and the returns are less fluctuating due to its inherent investment nature in securities for ultra short time duration.Further, liquid mutual funds very easily deliver a return way ahead of saving deposits.Liquid mutual funds deliver lower return in comparison to other debt funds since these funds invests in fixed securities for a very shorter durations which can even be for a day.
There is neither an entry load nor an exit load in Liquid mutual funds.These funds provide better returns in high inflationary situation when interest rates are high but RBI induces a lesser amount in the market to control liquidity. This is also to mention that if a person withdraws money from liquid funds he has to pay a short term capital gain tax based on his applicable income tax slab rate.Though the interest income from savings account is also taxable above Rs.10,000/- but it does not get the benefit of indexation unlike liquid mutual funds after three years. And the gains from liquid mutual funds after three years gets indexation benefits and gets long term capital gains @20%.
Liquid funds are easy to redeem. One can redeem money with one day prior notice, if you redeem your liquid fund investment before 2 PM, you will get money by 10 AM next morning in your account. Other major benefit is, you can do partial withdrawals in debt funds, which is not possible in case of bank FD.
To summarize, these funds are a good substitute to regular saving account since the liquidity is high, deliver more returns than regular saving account and have taxation benefits. Therefore, investors can invest their emergency funds in liquid funds.