LIQUID FUNDS

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.

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.

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.

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.

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!

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

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.

DIFFERENT ATTRIBUTES OF LIQUID AND LIQUID PLUS FUND :

Particulars
Risk Involved

Liquid Fund
Very low

Liquid Plus Fund

Comparatively higher risk involved

Long term debt

Exit load

No lock in periods
No exit load is charged

Has lock in periods of 515 days

An exit load is charged if one redeems before the lock in period

Restriction on fund component

Dividend distribution tax

10% or less mark-tomarket component

Dividend distribution tax is 28.33%.

No such restriction
Dividend distribution tax works out to14.16%

TOP RECOMMENDED LIQUID FUNDS :

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