Should you invest?
You may wonder what liquid funds are and how are they different from your bank fixed deposits. Liquid funds are debt mutual funds which invest capital in a very short-term market like treasury bills, commercial papers and certificate of deposits. Compared to other funds the capital risk is minimal, though the maturity of the investment is of 91 days. The NAV of a mutual fund is not volatile compared to other mutual fund schemes. Among all categories, liquid fund is the only category to get the previous day’s NAV.
Say at some point you receive a cash gift, a bonus or have redeemed an investment and you are looking to park away some large sums of money in equity to stagger it across over a period of time in the future, then your answer is liquid funds. Liquid funds invest in instruments with a high credit rating (AAA or AA) and don’t carry an entry or exit load like other funds. They offer more stability to investors where you can get your money back in a matter of minutes with a little bit of help in technology.
Before you invest in a liquid fund you should look at the expense ratio as more similar performing funds can have expense ratios that vary. The expense ratio indicates how much of the invested amount is being used to manage the expense of the fund. A lower expense ratio would mean a higher-take-home for investors.
The other important thing you should look at is the returns generated because the fund’s performance plays a crucial role. Selecting funds which have outperformed the benchmark would be the right way to invest in liquid funds.Depending on how long you have held your investment, whether short-term or long-term, liquid funds are taxed low compared to their peers. If a liquid fund is held for 36 months or less you’d attract a short-term capital gains tax depending on which income tax slab you are on. If your investment is held for 36 months or more, the taxes computed would be at 20 percent with the cost of indexation on the gains. Indexation is only the adjustment of your purchase price with respect to inflation. Unlike the power of compounding liquid funds help you store your wealth rather than grow it. Liquid funds offer better interest rates when compared to your bank account.