Know the Working of Your Liquid Funds

Liquidity is an important aspect of one’s personal finances. Is bank savings account the best way to maintain liquidity? No, there are better ways of managing liquidity. We can here mention about liquid funds.

Liquid Fund is a kind of mutual funds which invest your money in money market instruments such as a certificate of deposits, commercial paper, and Treasury bills, with a residual maturity of up to 91 days.

We should opt for liquid funds as it has some advantages.

Advantages of Liquid Funds

  • Liquid funds do not have a lock-in period. If one has surplus money in hand and does not want to lock them in fixed deposits, he/she can easily choose liquid funds other than bank savings account.
  • You can withdraw your money within 24 hours on business days.
  • You don’t have to pay any entry load and exit loads. This means one could invest on any day and exit on any day, without any penalty.

The difference between liquid funds and bank savings account:

Having a liquid fund is better than letting money lie idle in savings bank account. In saving bank account, the rate of interest is 4-5% while in liquid fund scheme; the rate of return is 8-9%.

Some top liquid funds in India:

  • Peerless Liquid Fund
  • INVESCO India liquid fund
  • JM High Liquidity Fund
  • Reliance Liquidity

But one should take into consideration the following things when he is opting for a liquid fund investment –

  • Payment of tax: There is no additional tax benefit when it comes to liquid funds. The interest which is earned on savings bank account is taxable. The first rupees ten thousands of income from interest on savings bank is not taxed. In the case of liquid funds also, though the dividend is tax-free, there is dividend distribution tax, which is paid by investor indirectly.
  • Ease of Operation: Operation of savings bank account is easier than that of liquid funds. In the case of liquid funds, money first comes to a bank account and then one can deal with it. But due to our advanced technology, one does not need to go to the bank to withdraw money. So withdrawal of liquid funds is slower.

When you are choosing a liquid fund, you have to keep the fund’s risk-return profile in mind. So you must choose larger fund houses and schemes. While choosing a liquid fund, the past return should not be the only determining factor. You also need to check aspects such as the size and track record of the fund, and credit quality of underlying securities

Most people start their systematic investment plans (SIPs) in equity mutual funds. But if there is a lump sum to invest, systematic transfer plans (STPs) are there. Systematic Transfer Plans earn a bit more than a traditional Systematic Investment Plan as the money which lies in liquid fund earns a higher return before it gets deployed in an equity fund. So it is a good idea to start a systematic investment plan into a liquid fund to build a contingency fund.