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Liquid Mutual Fund: How to invest ?

From some recent blogs, we are exploring different categories of mutual funds. We know that each mutual fund has been segmented by unique characteristics. Equity funds typically promise higher returns but come with greater risks, while debt funds are designed to offer more stability and modest returns. In today's blogs, we will see one more important fund which is: Liquid Funds. These funds are tailored to offer high liquidity with lower risk, making them an attractive option for parking surplus cash and managing short-term financial needs.

• What is a Liquid Fund?

Liquid Fund is a type of debt fund that invests in fixed-income instruments. This includes instruments like government securities, commercial paper, treasury bills, TREPS etc. These funds are more liquid and less risky than other debt funds. The maturity period of all these instruments in Liquid Funds is up to 91 days. 

• Features of Liquid Fund:

1. Liquidity:

In this fund, an investor can redeem their mutual fund units at any time. This process takes only T + 1 day to credit the investment amount into a bank account.

2. Short-term investment facility:

One can invest in Liquid Fund for a few weeks or even a few months. The maturity period of investment in this fund is maximum 91 days. Therefore, this fund is good for short-term investment.

3. Low Risk Fund:

Liquid Mutual Fund is a debt fund, so the risk in this fund is low and the returns are also low. The investment in this is made in an instrument that gives fixed returns.

4. No Lock-in Period:

All instruments that give fixed returns have some degree of lock-in period of investment, but there is no such lock-in period in Liquid Funds. Due to this investors can withdraw their money at any time.

5. No Entry-Exit Load:

Due to high liquidity in Liquid Fund, no entry load or exit load is levied. Due to which the total returns of the investment also increase.

• How Do Liquid Funds Work?

•  Investment Process: Investors decide to invest in a Liquid Fund by checking its Net Asset Value (NAV) before making a purchase.

•  Allocation of Funds: The fund manager invests the money in securities that mature within 91 days, ensuring quick liquidity.

•  Returns on Investment: Investors earn interest based on a fixed rate, making Liquid Funds a stable income option.

• Example:

If an investor puts 1,00,000 Rs in a Liquid Fund where the NAV is 100 Rs, they receive 1,000 units.

If after a few days, the NAV increases to 110 Rs, the total value of their investment becomes 1,10,000.Rs

When the investor decides to sell their units, the amount is credited to their bank account within T+1  day.

• How to invest in a Liquid Fund?

1. Download the Finshak App from the Google Play store or by clicking on the link given below.

https://play.google.com/store/apps/details?id=com.finshakapp.app&pli=1    

2. Open the App and log in by entering your Mob. Number or Email ID, or register first if you are a new user. 

3.  Complete KYC by entering your Card, PAN Card, and Bank Account details.

4. Go to the Mutual Fund section and select your investment option between SIP or Lumpsum.

5. Then make the payment of the selected amount and confirm the investment.

6. You can view the status of your investment in the Portfolio section of the App.

• Who should invest in Liquid Funds?

1. Liquid Funds are a great fund for investors who want zero risk and a short investment period.

2. Liquid Funds are also suitable for investors who think they will need money in an emergency because they have zero lock-in period and can withdraw their investment at any time.

3. Liquid Funds are great for many investors who are worried about problems like fluctuations in the equity market, rising inflation or economic instability.

• Conclusion:

Liquid Funds primarily focus on short-term investments. They offer low-risk and moderate returns, similar to savings accounts and fixed deposits, but often provide higher returns than savings accounts or nearly equal to fixed deposits.  But there is no lock-in period, making them a better alternative to bank deposits.  Another important point is they are suitable for parking surplus funds while ensuring liquidity and stability. 

• FAQ:

1. Are Liquid Funds better than Fixed Deposits?

Ans: There are some advantages and disadvantages of both these types. Liquid Funds do not have any lock-in period, while Fixed Deposits have a specific period of a few years, but Liquid Funds have more taxes than fixed deposits. 

2. How much tax is levied on Liquid Funds?

Ans: If your investment in Liquid Funds is less than 3 years, it is taxed as per the income slab and if the investment is for a period longer than that, LTGT is levied up to 20% as per the current rules.

3. In which instruments are investments made in Liquid Funds?

Ans: Investments in this fund are made in various fixed-income instruments like government securities, treasury bills, and commercial papers.

4. How much risk is there in Liquid Funds?

Ans: The risk in this fund is very low, but decisions regarding credit risk or interest rate can make a difference in the total returns.

5. What are the top Liquid Mutual Funds in India?

Ans: There are many Liquid Funds available in India. The major funds among them are as follows.

1. SBI Liquid Fund

2. HDFC Liquid Fund

3. ICICI Prudential Liquid Fund

4. Nippon India Liquid Fund

5. Franklin India Liquid Fund

6. UTI Liquid Fund

7. Axis Liquid Fund

8. Aditya Birla Sun Life Liquid Fund

9. DSP Liquidity Fund

10. Canara Robeco Liquid Fund.