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What are Liquid Funds & Know How To Increase Your Earnings From It

Author: Balwant Jain/Thursday, May 3, 2018/Categories: Mutual Funds, Expert View

What are Liquid Funds & Know How To Increase Your Earnings From It

In this article I wish to discuss a product called liquid fund where you can park your temporary surplus fund and get better returns than savings bank account.

What are liquid fund?

You can invest in liquid funds for even one day. Likewise money can be withdrawn within the shortest possible time, generally in one day, without any cost of exit load. Some fund houses like Reliance, DSP BlackRock, Aditya Birla, SBI and UTI offer you instant redemptions upto lower of 90% of your investment or Rs 50,000.

These funds invest in treasury bills, call money and deposit certificates of banks with maturity period upto 91 days and thus are safer and less volatile in terms of returns generated. The returns on these funds are little higher than bank fixed deposits with added liquidity at no extra costs. The average annual returns generated by liquid funds during past one year are 6.70%, which are better than FD.  

When the liquid funds can be used?

Liquid funds can be used by salaried people who have to maintain money in their saving bank account for EMI/house rent or for paying credit card bills. So instead of keeping the money in saving bank at around 3.50% returns, the same can be temporarily parked with liquid funds which can be transferred back to saving account just a day before the due date of EMI and credit card dues. It can be used by people who have kept money in saving bank account for buying a house, as the money may be needed at very short notice to get better returns with liquidity. Those who have withdrawn their equity investments to fund their approaching goal or for rebalancing of the assets to maintain predetermined asset allocation ratio, can also use liquid funds. 

Investors who have surplus funds and want to invest in equity funds periodically can also invest lump sum in liquid funds and effect a systematic transfer plan (STP) from it, as investing lump sum in equity funds is not advisable due to high volatility.

Taxation aspect of liquid funds

Liquid funds are treated as debt funds so it becomes long term when units are held for more than 36 months. In case STP or Systematic Withdrawal plan (SWP) each transaction of shift is considered separately and units involved if held for more than 36 months are treated as long term and get benefit of indexation. The profits on units held for less than 36 months are treated as short term taxed at the slab rate applicable. For units redeemed after 36 months, indexed capital gains are taxed at flat 20% plus applicable surcharge an cess.

How to do it?

With online banking and smart phone application/online platform of mutual fund as well as their registers, transacting in any mutual fund including liquid funds has become very easy. So you can transact units of liquid funds with your phone anytime anywhere.

The author is CA, CS and CFPCM 

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Balwant Jain
Balwant Jain

Balwant Jain

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1 comments on article "What are Liquid Funds & Know How To Increase Your Earnings From It"

Natarajan

5/7/2018 9:27 AM

Very relevant option of investment.

Presume the returns are taxable like debt fund dividends

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