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What are Liquid Mutual Funds?

Liquid funds are mutual funds that invest your money in short-term market instruments such as treasury bills, government securities, commercial papers and term deposits. These funds have low maturity period (3-6 months) and you can save money for example your child’s school fees. It is a low-risk instrument giving returns more than that received from bank.

Types of Money Market Instruments

Certificate of Deposit (CD)

These are timed deposits like fixed deposits(FD) offered by scheduled commercial banks. The only difference between FD and CD is that you cannot withdraw CD before the expiry of the term.

Commercial Paper (CPs) or Promissory Notes

Commercial Papers are issued by companies and other financial institutions which have a high credit rating. These are unsecured instruments which are issued at the lower/discounted rate and redeemed at face value. The difference is the return earned by the investor.

Treasury Bills (T-bills)

T-bills are issued by the Government of India to raise money for a short-term of up to 365 days. These are the safest instruments as these are backed by the guarantee of government. The rate of return, also known as risk-free rate, is low on these treasure bills compared to all other instruments.
 

Features of liquid funds

  • They have no lock-in period, withdrawals from liquid funds are processed within 24 hours on business days.
  • Liquid funds have the lowest interest rate risk among debt funds because they primarily invest in fixed income securities with short maturity.
  • Liquid funds have no entry load and exit loads, that means there is no penalty for exiting or breaking them
  • Dividends received are tax-free. However, taxation is applicable

 

Returns from liquid funds

Liquid funds are among the best investment options for the short term during a high inflation environment. Recent data shows that banks are taking fresh exposures in liquid funds which shows a high degree of safety and confidence in liquid funds.
 

Steps to invest in liquid Funds online:

Investing in Liquid Funds is simple and easily can be done through a company or online. If you want to invest in liquid funds online, use the following steps, you can start your investment journey:

  1. Sign in at any certified website like cleartax.in
  2. Enter your personal details regarding the amount of investment and period of investment
  3. Get your e-KYC done in less than 5 minutes
  4. Invest in your debt fund of your choice from amongst the hand-picked mutual funds

This is an overview of liquid funds and the benefits. There are other parameters to consider like which is the right time and the best liquid fund to choose from. The decision to choose is forthcoming for people who want to make short term investments.
 

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