Liquid Funds : 5 questions answered
What are 'Liquid Funds'?
Liquid funds are debt mutual funds that invest unitholders' money in very short-term market instruments such as Treasury Bills (T-Bills), CBLO, Government Securities (G-Secs) and call money instruments. These investments contain a minuscule amount of default and interest-rate risk.
Although such funds can invest in instruments up to a maturity of 91 days, the actual maturity is usually lower than that.
They are the least risky as well as the least volatile among various debt mutual fund categories, partly due to their investing in instruments with high credit rating and the other because their Net Asset Value (NAV) is not as volatile as the only change in such NAV is mostly the result of the interest income that accrues.
Given their short-term maturities, the underlying investments are rarely traded in the market. They are usually held until maturity. Hence, their NAV only sees a change to the extent of interest income accrued, everyday, including weekends.
Whom are they meant for?
Given that they provide ready liquidity, income and tax-efficiency, retail investors could choose this option as an alternative to bank deposits.
However, it suits corporate investors too, due to factors like quick redemption (T+1 working day) and ability to accept large sums of money.
Investors could also use such funds to park their short-term surplus and transfer portions of it to equity mutual funds through the Systematic Transfer Plan (STP) route.
How are they taxed?
for FY 2018-19 (AY 2019-20)
How can one invest in Liquid Funds?
The investment procedure is the same as that for other categories of Funds. Investments can be undertaken either by filling an Application Form or online. Both, Direct Plan and Regular Plan options are available.
What is the difference between a Liquid Fund and a Money Market Fund?
While the investment universe is broadly similar, the latter is also permitted to invest in Corporate Bonds.