Tuesday, 27 March 2012

Liquid Funds-All About Liquid Funds

Finance Market is full of various products and investment options. Each Product has got its own significance. One needs to understand the product before venturing your money on to it.
Liquid Funds are something like “You can Hate them or You can Love them but You can IGNORE them”.
Let’s Dive Deep and Look into Details:
Liquid Funds: To major extent the word "Liquid" itself speaks a lot on its own. Liquid Funds are debt Mutual funds that can be considered as an alternative option to Savings Bank account or Short Term Fixed Deposits. Liquid funds returns are much higher than Savings Bank and slightly less than the Bank FD's. Returns of Liquid Funds are in range of 8% to 10%.
Let us see some Good Points of Liquid Funds:
·    Attractive Interest Rates of 8% to 10%
·    No Entry or Exit Load (If exited after Lock-in Period)
·    Easy Liquidation- Is Redeemed in less than 24 hours.
·    Lock-in Period - Liquid funds genreally dont have lock in period. In case there is any, it is for very short period.Some have it for maximum of 3 days.
You might be wondering, if everything is so good about Liquid Funds why they are not very popular among common investor:
Liquid Funds do have some Not So Good points associated to it. Let’s see what are they.
  • Not Risk Free: Liquid Funds come with very minute element  of Risk. 
  • High Initial Investment: Liquid Funds do have minimum investment criteria. Generally 10K and above. Some liquid funds have intial investment of 50k.
  • Cannot be pledged: Unline Fixed Deposits, Liquid Funds Cannot be pledged.
Let’s get into some quick comparison. Comparing Liquid Fund and Bank FD.
  • Tax: Liquid funds score better on tax front. Returns of Fixed deposit gets added to the income and hence taxed as per Tax bracket. Returns of FD suffer heavily for people in higher tax brackets.
  • Term/Tenure: Liquid funds score higher in comparison to Bank FD's.  Liquid Funds generally dont not have lock-in period. In case they have it would be for very short tenure. Deposits come with Longer Tenure. Penalty is imposed on premature withdrawal.
  • Safety: Both Liquid Funds and Fixed Deposit are safe in nature; however Fixed Deposits score better as returns are not market linked.
  • Returns: Fixed Deposits have Predefined interest that is fixed throughout the tenure. In case of Liquid funds the interest rate changes hence the returns are not guaranteed.
Take Away: Based on the above comparison, one can notice that it is difficult to pick a clear winner.
Couple of Practical Usage of Liquid Funds:
  • Liquid Funds can be good option to park your emergency fund.
  • Corporate or Companies can use Liquid Funds to park huge funds for short period of time.
  • Invest Lump sum in Liquid and Route to Equity MF via STP.
Are Liquid Funds Part of your portfolio? 


Vinay S Shastry said...

I don't know what your source is about the lock-in period. I'm yet to encounter a liquid fund with a lock-in period.

Same again with initial investment amount. Minimum first investment amount is INR 5000 for most retail funds.

There is no 7-10 day tenure for liquid funds. You can invest today, get units allotted by tomorrow, and sell day-after in most cases.

WealthUCreate said...

I take your inputs. I will recheck my notes and if needed i will update the information. Thanks for highlighting. Attempt is to provide right information.

Thanks again

WealthUCreate said...


I have updated the article. You were right when you say, 7-10 days lock in period. I have corrected it. Furhter, regarding intial investment, i see some liquid funds from HDFC are having bigger intial investment. Considering this not to be same afor a llquid funds. i have updated 10 k is the amount hat needs to be invsted.

Thanks again for taking time and pointing out the changes to be made.

Vinay S Shastry said...

Thank you for the fixes. Glad to be of assistance. :)

Anonymous said...

what are the tax implications in case of liquid funds? can you please elaborate

WealthUCreate said...

Tax Implication : Liquid Funds scored over FD in terms of taxation. For a person in highest tax bracket end up paying 33% by investing in FD.

Instead of this, if he invests in Liquid fund with dividend option. dividend in the hands of investor is tax free. The fund company would have already paid Dividend distrubution tax 28.33% which is lesser in comparision to tax in case of Fixed Deposit.

If you are in low tax bracket. It makes sense to park your money with banks offering 10.5% interest.

Liquid Funds are more of alternatives to savings bank. Instead of keeping your money in savings account, park in liquid funds. Hope i am clear

Anonymous said...

Kindly let me know the income tax implications in following categories:

1) STCG & LTCG for liquid funds
2) STCG & LTCG for low duration funds like templeton India low fund.

Is the taxation same like debt funds ? Where to invest in above funds, growth or dividend options.

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