Liquid Funds - Turbocharge Your Idle Savings

Liquid Fund Facts

7.05%	0%	10 Lakhs cr +	T + 1
Average 3-year return	Exit load	Invested into Liquid Funds	Get your money within a day

Who Should Invest in Liquid Funds?

• Investors looking for a safe place to park surplus funds for a short period.
• Individuals who want easy access to their funds without worrying about the market volatility.
• Investors seeking moderate to lower returns and taking significantly lesser risk
• Many equity investors use liquid funds to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP) – a method of equity investing to mitigate risk.

How to Invest in Liquid Funds?

Investing in a liquid fund is relatively simple and can be done seamlessly.

Here’s a step-by-step guide:

1.  Choose a Platform That Suits Your Requirement and Gives Access to Expertise:

Online Platforms/Apps: There are several online platforms where you can invest in mutual funds, including liquid funds. Dreams into Action (DiA) – FinEdge’s proprietary investment platform is an ideal place to invest. Not only do you have access to most funds, you would also be able to get the benefit of an expert for managing your investments.

Directly through AMC (Asset Management Company): You can invest directly through the website of the mutual fund company (AMC) that offers the liquid fund.

2. Complete KYC (Know Your Customer) Process:

Before investing, you need to complete your KYC. This is a one-time process where you submit identity and address proofs (like Aadhaar, PAN card, etc.). 

You can do this online on the DiA platform, where you provide the necessary documents and complete the process through video verification.

3. Select the Liquid Fund by conducting research different liquid funds available in the market. Look at factors such as the fund’s performance and the credit quality of the underlying assets.

4. Executing the Investment: 

Decide how much you want to invest. Liquid funds typically require only a small minimum investment amount, making them highly accessible. 

You can invest as a lump sum or through a Systematic Investment Plan (SIP), though SIPs are less common for liquid funds due to their short-term nature and low volatility. 

On the platform or AMC’s website, select the liquid fund you want to invest in. • Choose the investment amount and the mode of payment (net banking, UPI, etc.). 

Confirm the transaction. Once done, you will receive a confirmation of your investment. 5. Redeem When Needed: • When you wish to withdraw your money, simply place a redemption request on the platform. 

The amount is typically credited to your bank account the next business day, making liquid funds a good option for managing short-term cash needs.

Investing in liquid funds is a straightforward process that offers a convenient way to earn better returns on idle cash while maintaining easy access to your funds. 

Liquid Funds FAQ's

What Are Liquid Funds And How Are They Different From Other Debt Funds?

Liquid Funds invest into debt securities with very short maturities. The residual maturities if bonds held by liquid funds do not exceed 60 to 90 days. Many liquid funds prefer to maintain average maturities that are even lower (15-20 days). As per rules prescribed by SEBI, bonds maturing within two months need not be ‘marked to market’ – only their interest component needs to be factored in while calculating NAV’s (net asset values). Hence, the NAVs of Liquid Funds remain relatively steady compared to other debt funds.

Are Liquid Funds Risk Free?

Liquid funds are very low risk, but not risk free. Despite the fund management team’s best efforts, sometimes bonds held by liquid funds default (as was the case with Taurus Mutual Fund recently). Owing to their very short maturities, this remains a remote possibility - but the risk still exists on paper. When a bond held by a liquid fund defaults, the fund needs to write off its value. This results in a hit on the fund’s NAV. In a nutshell – liquid funds are very low risk, but not risk free. It’s best to stick with liquid funds of large and renowned AMC’s, which employ more robust research teams.

Do Liquid Funds Provide Guaranteed Returns?

Unlike Fixed Deposits or Savings Accounts, Liquid Funds do not provide guaranteed returns. However, they do provide very steady returns, owing to the nature of their portfolios. In the present scenario, liquid funds can be expected to provide annualized returns in the range of 6% to 7%.

How Are Liquid Funds Used In STP's (Systematic Transfer Plans) ?

Their low volatility, steady returns and zero exit costs make liquid funds an ideal choice as a pass-through vehicle for STP’s (Systematic Transfer Plans) into equity funds. Say, you have 5 lakhs sitting in your savings account (earning 3.5% per annum) and you’d like to invest this money into equities, for the long term. However, you are sceptical about rich valuations and the short-term direction of the stock markets. In such a scenario, you could choose to park the 5 lakhs into a liquid fund, and initiate an STP into an equity fund from it. Over time, your liquid fund balance would be transferred to your chosen equity fund. In this way, you’ll be protected from the risk of investing your entire money at an interim market peak. You’ll benefit from corrections as you’ll be making a staggered entry into the equity fund. At the same time, your idle balance will earn better returns than your savings bank account.

How Are Liquid Fund Returns Taxed?

Profits earned on your liquid fund units (at the time of redeeming or switching them) are taxed per your income tax bracket if done within three years (a likely scenario, as liquid funds are meant for short term investments). In the unlikely scenario that you hold on to your liquid fund units for more than 3 years, the profits will be indexed for inflation and taxed at a flat rate of 20%.

How Soon Can I Get My Money Back From My Liquid Fund?

If you log in the redemption request before 3 pm today, you’ll get your money in your account the next morning. However, SEBI has recently mandated that AMC’s should allow instant redemptions of up to Rs. 50,000 from Liquid Funds. Many AMC’s have already implemented this. Your Financial Advisor can help you clarify which funds currently offer this facility, and which ones do not.

* Returns could vary between various funds and are not guaranteed