Unlike other mutual funds, liquid funds have a period of up to 90 days which ensures that an investor has a higher level of capital security and liquidity. But, what is liquid fund? Liquid funds are a type of mutual funds that invest in securities that are short-term in nature such as government securities, treasury bills, commercial paper, Certificate of Deposit (CD), repos, etc. Investors invest in these mutual funds to park their money for short tenure say 1 to 3 months. Common examples of liquid fund investment include a holiday planned over the next couple of months, paying for your child’s school fee instalment, etc.
Liquid funds could also be used when an investor has a sudden influx of money, which could be the sale of real estate or a huge bonus and so on. Many equity investors also use liquid funds to sway their investments into equity mutual funds using the systematic transfer plan or STP, as they believe this could yield them higher returns.
Liquid funds offer instant withdrawals wherein the redemption amount can be accessed within 24 hours. Individuals prefer this mode of investment as they provide instant liquidity in case of a contingency or an emergency. There is no entry or exit load charged by fund houses in case of liquid funds. Also, liquid funds provide a higher rate of returns than most banks on their savings account. They also offer tax benefits making them a lucrative option for most investors as the gains taxed are termed as Short-Term Capital Gains or STGC gains. Liquid funds are subject to taxation as per debt funds.
Mutual fund investments are subject to market risks. So, if you are unsure about your investments, seek help from a financial expert. Happy investing!