Most mutual fund investors understand the benefits of diversification and a long term strategy. But it’s important to have money at hand for unexpected short term events or emergencies.
This is where liquid funds prove to be beneficial. Instead of letting surplus money rot in a savings bank a/c, investors prefer to park their surplus in liquid funds.
Liquid funds are known to give returns of up to 7-8%, which is higher than a savings bank a/c known to have an interest rate of 2.5-4%.
How A Liquid Fund Works
A liquid fund is a type of debt mutual fund that can offer better returns than a bank savings account or fixed deposit.
The fund manager invests your money in a variety of fixed income instruments and debt securities like:
Certificates of deposit
Important Things To Know About Liquid Mutual Funds
The NAV for a liquid fund is calculated for 365 days. Other mutual fund NAVs are calculated for business days alone.
You get the previous day’s NAV of the liquid fund if your allotment request is received before 2 PM.
You can withdraw your money from a liquid fund within 24 hours. Some liquid funds also have the ‘Insta redemption’ feature.
The Cube Wealth app gives you access to the “Cube ATM” feature. You can use Cube ATM to move money from your liquid fund investments to your bank account in minutes.
Here are snapshots of Cube ATM in action
Benefits of Liquid Mutual Funds
Benefit #1: Low maturity period
Investors prefer liquid funds for the short term because these funds have an average maturity period of 91 days.
Benefit #2: Lower fluctuations
The short maturity period ensures that the fund is less likely to be affected by interest rate fluctuations.
Benefit #3: Better stability
More often than not, liquid fund returns are very stable since the short term securities don’t fluctuate much as compared to long term bonds.
Let’s look at the benefits of liquid funds at a glance:
No entry load
No exit load
Lowest interest rate risk
Better returns than bank a/c
Higher returns than bank FD
No lock-in period
Liquid funds are also considered to be the safest mutual fund investments available to an Indian investor.
Is A Liquid Mutual Fund Taxable?
You won’t be liable to pay taxes on the dividends that you receive from your liquid fund investments. However, you will have to pay capital gains tax.
Whatever profits that you earn is known as capital gains. These gains are taxed based on the duration of your investment (holding period).
Let’s look at the Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) tax that you might have to pay:
Short Term Capital Gains
< 3 years
As per I-T slab
Long Term Capital Gains
> 3 years
Liquid funds offer an indexation benefit, which means that the initial purchase price (NAV) will be adjusted as per the inflation rate.
Higher the purchase price (adjusted for inflation), lower the tax you’ll have to pay.
How To Invest In Liquid Mutual Funds
The easiest way to invest in liquid mutual funds is through the Cube Wealth app. Cube gives you access to a curated list of the best liquid funds.
These liquid funds are handpicked by our mutual fund advisor, Wealth First. WF has a historical track record of beating the market by approximately ~50%.
The Cube Wealth app also makes it easier for you to invest in liquid fund SIPs with the QuickSIP and SuperSIP feature.
Speak to a wealth coach before you invest in any mutual fund. A wealth coach can help you identify your investment goals, risk tolerance, time frame, and more.
But more importantly, you can invest in some of the best mutual funds for medium-term and long term goals. You can do this after speaking to a wealth coach or yourself using the perfect portfolio builder.
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