Liquid Fund

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Liquid Funds
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What are Liquid Funds?

• Liquid funds are used primarily as an alternative
  to short-term fix deposits. Liquid funds invest
  with minimal risk (like money market funds). Most
  funds have a lock-in period of a maximum of three
  days to protect against procedural (primarily
  banking) glitches, and offer redemption proceeds
  within 24 hours.
• In short, a liquid fund is the same as a money
  market fund, but avoids a lock-in period.

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What are Liquid Funds invested in?

• Liquid funds invest in money market instruments.
• Money market is a market for short term borrowing
  and lending.
• This market deals with debt instruments such as
  certificate of deposits, commercial paper and
  treasury bills.

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What is the 'lock in' period for Liquid Funds?

• Most funds have a lock-in period of a maximum of
  three days to protect against procedural
  (primarily banking) glitches, and offer
  redemption proceeds within 24 hours. 
• However, some funds may even have a lock in
  period of a week or a month or more. However, the
  tenure is always far less than a normal mutual
  fund.

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Features of Liquid Funds

• No entry and exit load is charged on the
  investment amount.
• Low annual fee 0.30 to 0.70
• Minimum investment requirement is Rs 5000
• Great tax benefit
• Easy liquidation (hence the name)
• An average 8 p.a return
• It has the restriction that they can only have
  10 or less mark-to-market component, indicating
  a lower interest rate risk.
• Redemption time within 1 day.

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What are Tax Benefits?

• If you invest in a short-term fixed deposit, the
  returns are taxable as per the investor's tax
  bracket. Therefore, if you are in the highest tax
  bracket most of your returns from the fixed
  deposit would be wiped out.
• On the other hand with liquid funds, if the
  dividend option is taken, the returns are
  tax-free in the investor's hand!

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How does it compare to a short-term fixed deposit?

• Fixed Deposit

• Liquid Funds

• Returns on investments range between 4-5
• The interest on Fixed deposit is taxed by adding
  it to the assessor's income.
• Long Tenure
• Returns are fixed
• Not dependent on market performance

• Returns on investments range between 5-8
• If you opt for a dividend option the dividend is
  tax free in the hands of the investor
• Very short tenure
• Returns are not fixed
• Dependent on market performance

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Different type of Liquid Funds

• There are mainly two types of liquid funds viz
  liquid and liquid plus funds.
• Liquid Plus Funds There is another type of
  liquid funds which generally invest a larger
  portion, of the net assets in the debt securities
  having maturity period of 2-3 years or more. A
  typical liquid-plus fund generally have similar
  investments like a liquid fund, but around 30 per
  cent of the corpus is invested in instruments
  with longer maturity period.
• This funds are suitable for those with a higher
  risk appetite wishing to earn higher return.
  There is no restriction for this fund on the
  mark-to-market component like the liquid funds
  and there is no lock-in period also.

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Different attributes of Liquid and Liquid Plus
fund
Particulars Liquid Fund Liquid Plus Fund
Risk Involved Very low Comparatively higher risk involved
Long term debt No lock in periods Has lock in periods of 5-15 days
Exit load No exit load is charged An exit load is charged if one redeems before the lock in period
Restriction on fund component 10 or less mark-to-market component No such restriction
Dividend distribution tax Dividend distribution tax is 28.33. Dividend distribution tax works out to14.16
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Top recommended Liquid Funds
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