Liquid Funds

We keep our funds in savings account for safety and convenience to withdraw it any time. 

While a savings account is a good option to keep your money handy, is it really the ideal way to save your money?

Liquid funds offer a potentially rewarding parking facility for short-term, idle cash.

What are Liquid Funds?

Liquid Funds are mutual fund schemes that invest in debt and money market securities with less than 91 days to maturity. Money is invested in Repo, Call Money, Treasury Bills, Commercial Paper, Certificate of Deposit and Non-Convertible Debentures. Liquid Funds maintain a portfolio average maturity of up to 60 days, hence their primary source of income is interest. The income from Liquid Funds is generally determined by short-term interest rates.

Liquid Funds are positionedat the lowest end of the risk-return scale and operate on the principle of Safety, Liquidity and Returns in that order of priority.

Benefits of Liquid Funds

• High Liquidity: Liquid Fundsare open ended mutual fund schemes and have no entry or exit load. Hence an investor can withdraw money any time. An investor can avail of the direct credit facility to his bank A/c.The redeemedamount normallygets credited within one working day if the redemption request is submitted before cut-off time.
• Low Risk: Liquid funds offer highest degree of safety asthe investment is done in short term debt securities of high credit quality.Investment is done in securities with residual maturity of less than 91 days. This greatly reducesinterest rate risk and hence volatility in returns generated by these funds.
• ReasonableReturns: Primary source of income for liquid funds is interest accrual. During tight liquidity conditions, liquid funds benefit from high interest accrual.

Taxation (Rates applicable for Individual/HUF for FY2013-14)

• Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.
• Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.
• Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower plus surchare plus 3% cess.

Outlook

Short term rates are expected to remain lower as deposit growth for banks continue to remain low and credit pickup remains weak in Apr-Sept season.

1-month CP and CD rates closed at 8.00% and 7.65% respectively as on 02-July'13. Call money rate ended at 7.00-7.15% . Since most of the return for liquid funds come from coupon income, liquid funds will continue to offer reasonable return on surplus cash.

Who should invest?

Liquid Fund are suited for investors who have a very short investment horizon (few days to 3Months)and want quick liquidity and better than average returns from their surplus money.