All about Liquid Mutual Funds!

Liquid Mutual fund is a debt-oriented fund that offers investors an opportunity to fulfil their short-term goals.

Presently, it has become essential for every individual to save money for their future goals. Initially, when people use to talk about saving, the first investment instrument that use to come to their mind was bank fixed deposits or government-backed investment instruments. But these saving instruments couldn’t deliver inflation-beating returns. However, with changing times, now there are a variety of investment options available for an individual to park his/her funds and receive optimal benefits from the same. Similarly, mutual funds offer various types of schemes in order to cater for the needs of an individual. One has long term, medium-term as well as short term goals which can be fulfilled by selecting an appropriate mutual fund scheme and investing a sufficient amount of funds in order to fulfil your goals.

As of October 2021, in total there are 1,435 schemes including ETFs and Fund of Funds (FOF). Liquid Fund is one of the sub-categories of debt mutual fund schemes. This fund is a short-term debt fund where an investor can invest to fulfill their short-term goals and objectives. This is an open-ended mutual fund scheme investing in debt and money market instruments with a maturity of up to 91 days only. As per the Association of Mutual Funds of India (AMFI), the Net Asset Under Management (AUM) of the scheme is Rs 3,14,547 crore as of October 2021.

Who should invest in liquid funds:

1. Individuals with lower risk appetite: The liquid fund is a low-risk mutual fund scheme as it is a debt fund, it offers preservation of capital and delivers steady returns to their investors. It is ideal for investors with a lower risk appetite. As this is a short-term investment scheme there is no risk of interest rate fluctuations.

2. Individuals with short investment horizons: This mutual fund scheme is best suitable for individuals who have short-term goals or investment horizons. Generally, these funds are ideal for investors who have an investment horizon of three months, but if they have an investment horizon of longer than three months, then they should consider investing in other schemes to receive optimal benefits.

3. Individual who wants to park funds temporarily: Individuals who want to park their funds temporarily or currently don’t need the funds, but require the same funds after a few months. Such individual should invest their funds in this scheme as it is a safe instrument and delivers a steady return.

Taxation: 

As these are short term debt funds they will be taxed as follows:

If capital gain arises within 36 months i.e., 3 years then such capital gain is known as Short-term Capital Gain which will be taxed as per the income tax slab rate of the assessee. There is no indexation benefit on short term capital gain, as it is only applicable in the case of long-term capital gain.

If in case, an investor holds these funds for more than 36 months i.e. 3 years and sells the same, then such capital gain will be known as Long-term Capital Gain which will be taxed at the rate of 20% with the benefit of indexation.