Liquid Funds : All you need to know about Liquid Mutual Funds



  • This blog post will try to answer following questions

    • What are liquid funds
    • Where do liquid funds invest
    • What are the top liquid funds in India
    • Why and when you should invest in liquid funds
    • Why liquid funds are better than saving accounts
    • Liquid funds versus Fixed deposits
    • Tax implications of liquid funds
    • How to chose liquid funds

    What are liquid funds :
    Liquid funds are class of mutual funds which invest in Money market instruments  like  treasury bills, commercial paper, certificate of deposits, and term deposits most of these assets have 3 months to 13 months of  maturity period which in turn gives fund manager flexibility to meet immediate redemption requests.

    Why are they called liquid funds  
    Liquid name comes from the fact that withdrawals from these funds are processed within 24 hours hence its quite a liquid asset

    Why should you invest in Liquid Funds

    • Liquid funds provide 24 hour withdrawl rates, hence is a good instrument to park your emergency funds ( which you can require at short notice)
       Returns do not fluctuate much as they invest in short term debt instruments and interests rates do not change so much in short term , hence they are relatively risk free.
    • Come with zero entry and exit loads, hence not many overheads in investments
    • Flat tax outgo on liquid funds is  is 28.325 %  If you are in 30 % tax bracket, and hold on to liquid funds for more than a year, you will save on some tax out go as
    • They give higher return than savings account hence move your money from savings account immediately

    What are the various option in Liquid funds

    Top liquid funds in India as per Crisil are as follow

    • India bulls liquid fund
    • L&T liquid funds
    • Sundaram money fund
    • Axis Liquid Fund
    • DSP black rock liquidity fund
    • For detailed analysis of  top liquid funds in 2016 subscribe to  our news letter

    Why Liquid funds are better than savings account
    Liquid funds are better than savings account for following reasons

    • They provide superior returns over savings account, in general top performing liquid fund can gave you anything between 1-2 % higher return
    • At the same time it is as  liquid as Saving account money, money can be credited to you in 24 hours, and does not carry too much risk.
    • There is no exit load
      For more details read my post on Liquid Funds versus Savings account

    Tax implications of Liquid Funds

    • If you chose growth options  and you do not withdraw within  a year  liquid funds are supposed to pay Dividend Distribution Tax (DDT), As per current income tax norms rate of DDT is 28.325 % (  Tax Rate 25 % + 10 % surcharge + 3 % Cess).
    • In case your tenure is less than a year then short term capital gains are  taxed at your personal tax rate
    • So in general if your tax slab rate is 30 %+ , you should invest in dividend re-investment which will make it more tax effecient , if your are in lower bracket you  can take out your dividend.
    • The  other good thing is in general Mutual funds do not deduct tax at source, so you have more time.

    Liquid Funds versus Fixed Deposits

    • Liquid funds offer better liquidity then Fixed deposits, you can get your money in 24 hours and for some funds through ATM also.

    • There is no exit load for liquid funds but in case of an FD for premature withdrawal one has to pay a penalty

    • In last 2-3 years Liquid funds have outperformed FDs in terms of returns
      With recent changes there are not much difference in how tax treatment of FDs and Liquid funds

    • Liquid Funds versus ultra  short term Debt Funds

    • Liquid funds invest in securities  with maturity upto 91 days, Ultra short term debt funds invest in securities with maturity upto 1 year

    • Liquid funds come with no exit load, some of the ultra short term debt funds come with an exit load

    • Due to nature of underlying securities volatility and risk is lower for liquid funds, as compared to short term debt funds

    How to chose a liquid funds.
    Key factors to look at while chosing a liquid fund are as follow

    • Size of the fund , in general it is a positive sign for me  since most of the investments in a liquid funds are from institutional investors , it is always
    • Credit rating of the scheme , you can refer to Crisil rating
    • Look at the portfolio of the investments made by the fund
    • Look at expense ratio, all things being same ,I would prefer funds with lower expense ratio

    When should you invest in liquid funds
    Liquid funds investments are best to park money which you require almost immediately, so my first suggestion will be that move all your cash holdings and savings account holding to liquid funds, you can also move part of FDs also to liquid funds, chose dividend re-investment option if you come under tax 30 % tax bracket.



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