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Liquid funds in 2022: Liquid Mutual Funds Meaning, Returns & Benefits

Looking to understand how to invest in liquid funds in 2022? Here is a detailed guide on liquid mutual funds, its benefits, risks & returns.

The first step to financial planning begins with building and maintaining an emergency fund for any individual. One of the best financial products for this purpose is a liquid fund. In this article, we will understand liquid mutual funds' meaning, returns & benefits.

What is a liquid fund?

A liquid mutual fund is an open-ended scheme that invests all its money in debt and money market securities with a residual maturity of up to 91 days only. Residual maturity is the number of days remaining for the security’s maturity.

How do liquid mutual funds work?

A liquid fund invests the money collected from investors in various debt and money market securities as per the scheme's objectives. The investors are allotted scheme units in proportion to their investment. The net asset value (NAV) of the scheme units moves up and down as per the value of the securities in which the scheme has invested.

The main focus of a liquid fund is to provide liquidity to its investors, along with safety and returns. Some liquid funds provide the facility of 'insta redemption' to their investors to provide them with instant liquidity. Under this feature, an investor can redeem their units up to a specified value (for example, 90% of the holdings' value or a maximum of Rs. 50,000, whichever is lower). The money is credited to their bank account instantly. The investor has to follow the regular redemption process for the remaining amount.

How to invest in liquid funds?

An investor can make a liquid fund investment directly through the AMC website or an intermediary platform like Glide Invest. An investor can choose to invest in a regular or direct plan. The expense ratio for a direct plan is lower than a regular plan.

While investing in liquid funds, you will have to:

  1. Complete your e-KYC (Know Your Customer),
  2. Register and create an account either on the AMC website directly or on an intermediary platform
  3. Choose the liquid fund scheme for investment, the amount, etc. You can either invest a lump sum or start a systematic investment plan (SIP). For a SIP, you will have to select the instalment amount, monthly date of investment, the tenure of SIP, etc.

Who should invest in liquid funds?

People who have safety and liquidity for their investments at the top of their minds should invest in liquid funds. An individual can invest in liquid funds for the following purposes:

  1. Building and maintaining an emergency fund with 3-6 months of regular expenses.
  2. Parking a lump sum amount received either as a bonus or investment maturity/redemption or from an asset sale. The amount can be parked temporarily in a liquid fund until the investor decides how to use or invest the lump sum.
  3. Investing a lump sum amount in a liquid fund and then using a systematic transfer plan to make a regular investment in another mutual fund scheme such as an equity scheme.

Taxation of liquid funds

Liquid funds are classified as debt funds and taxed accordingly.

  1. Short-term capital gain (STCG) tax: When a liquid fund investment is redeemed within 36 months, the profit is known as short-term capital gain (STCG). The STCG is added to an individual’s income and taxed as per the income slab.
  2. Long-term capital gain (LTCG) tax: When a liquid fund investment is redeemed after 36 months, the profit is known as long-term capital gain (LTCG). The LTCG tax is levied at 20% after the indexation benefit.

Key features of a liquid fund

Some of the key features of a liquid fund include:

  1. Liquidity: Some liquid funds provide instant liquidity to their investors, which may be required in cases of emergencies. The money is transferred to the investor's bank account instantly through IMPS. However, there may be limitations on the amount redeemed using the insta facility.
  1. Safety: Liquid funds invest in money market instruments and other debt instruments with a residual maturity of up to 91 days. These investments are relatively safer than many other investment products.
  1. No lock-in period: There is no lock-in period for investments in liquid funds. However, some liquid funds may levy a small fee for redemption within seven days of investments.
  1. Low charges: The expense ratio of liquid funds is lower than the expense ratio of some other debt and equity funds.

Top liquid funds in India and their returns

Some of the well-known liquid funds in India and the returns given by them include:

Scheme name
(Direct Plan - Growth Option)
AUM
(Rs. crores)
1-year
(Absolute Returns)
3-years
(CAGR)
5-years
(CAGR)
Quant Liquid Plan4164.31%5.70%6.23%
Franklin India Liquid Fund1,5933.32%4.94%5.81%
Mahindra Manulife Liquid Fund1,5473.40%4.92%5.81%
IDBI Liquid Fund8963.42%4.95%5.81%
Edelweiss Liquid Fund1,3863.48%4.93%5.80%

Risks associated with liquid funds

In terms of risks, liquid funds are usually considered relatively safer than most other debt funds. However, there can be a credit risk if a company/organisation defaults on principal repayment or interest payment, or both. In such cases, the NAV of the scheme will have to be adjusted downwards to price the risk.

Conclusion

Among various debt investment options, liquid mutual funds are one of the best investment options. If you are looking for an investment option that provides liquidity, safety, low charges, and low to moderate returns, then you may consider investing in liquid mutual funds. An individual who wants to build and maintain an emergency fund or park a lump sum amount for a short duration can invest in a liquid mutual fund. An investor can also use a liquid fund to invest a lump sum and then use a systematic transfer plan to transfer money into an equity scheme every month.

To read more on similar topics, click here:

To start investing in liquid funds and other mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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