Planning to buy a new phone? Going on vacation next month? Alright. Let’s discuss Liquid Funds.
Liquid funds are the best avenue to park your money for a week or a couple of months. An alternative to your bank account. These funds are suitable for investors looking for short-term investments and quick withdrawals.
Sounds convenient? Read along.
As the name suggests, these funds are liquid in nature. Meaning, you can withdraw as quickly as you invest.
Liquid funds are a collection of bonds, RBI treasury bills, and commercial papers that mature within 91 days. However, investors are free to withdraw the funds in a week with zero exit load.
You can also withdraw these funds in a day. But by holding them for 7 days, you become eligible for the zero exit load.
These funds are not only safe to invest in but also deliver better returns than your saving account.
Please note-> Even though the maturity period is short, you can choose to hold these funds for a longer duration. The ultimate goal is to have a flexible and quick withdrawal process.
As these funds have a short average maturity, you can park your money for a couple of weeks to months.
FD, PPF, Equity Funds, and Long-Term Debt funds can encourage your long-term wealth goals. Liquid funds can fulfill your short-term goals like buying a phone or planning a trip.
The underlying assets in these funds are of high credit quality (RBI T-Bills). Fund houses invest in assets with AAA credit quality. The chances of credit risks are scarce.
These funds have very little to do with market volatility. And as these funds mature quickly, interest rate changes also have a low effect on the returns.
Liquid funds prioritize security and liquidity. The returns may not be as high as equity funds or other debt funds in an ideal scenario.
But you for sure will earn better returns than the saving account. Shift a certain amount in liquid funds instead of keeping it all in a bank account.
The systematic Transfer Plan (STP) is a SIP alternative with an option to invest a lumpsum amount.
You can invest a lumpsum amount in a source mutual fund and transfer it in installments into target mutual fund(s).
These funds are perfect as a source mutual fund of STP. As the liquidity is high and the exit load is zero, setting up an STP becomes convenient.
Read more about Systematic Transfer Plan.
Liquid funds deliver decent returns compared to your savings account. If you are expecting much higher returns, then you may want to explore other debt funds or equity funds.
The primary reasons to invest in these funds are security and quick redemption. Returns may not touch the sky but you will earn a decent profit.
You may already have investments in place for certain goals in life. Retirement funds, education funds, family wealth goals, etc.
Similarly, you can invest a certain amount for short-term goals like buying a new bike or a laptop. These funds help you earn some extra money for the things you want to purchase in the near future.
Every mutual fund will carry some sort of risk. Though liquid mutual funds offer security, both credit and interest rate risk are not completely absent.
The good thing is, most funds allocate the majority of the assets to high-credit quality assets. And as for the interest rate risk, that’s temporary. You will still earn decent returns.
While you can surely invest in these funds for up to 91 days, we recommend taking advice from financial advisors. Reach out to us to know more.
As per the new 2023 tax rule on debt funds, investors no longer have the benefit of indexation on Long-Term Capital Gains.
Now both long and short-term capital gains on debt funds will be taxed as per your income tax slab.
Liquid funds are particularly suitable for investors looking for short-term investments. You can park your money in these funds to earn superior returns than a saving account.
Investors planning to start Systematic Investment Plan should definitely go with liquid funds to invest a lumpsum amount.
So, next time you buy a gadget or shortlist vacation spots, think about liquid funds as your companion. It’s the most convenient way to earn extra returns without any lock-in period or exit load.
These funds often deliver superior returns compared to interest on savings accounts, are secure and offer quick withdrawal. And as mentioned above, these funds are best to start an STP.
To know more about debt funds and plan your investment, give our advisors a call. With a complimentary portfolio analysis, let’s align your investments with your financial goals.
