An Introduction To Liquid Funds Or Money Market Funds

By Dheeraj Kapoor | February 17, 2017

An Introduction To Liquid Funds Or Money Market Funds

Let’s give you an introduction to Liquid Funds. We’ll answer a few important questions about the features of this investor-friendly investment option and tell you all you need to know before you decide if Liquid Funds are for you.

What Is A Liquid Fund?

Liquid Funds fall into the category of Mutual Funds that make investments in various money market instruments such as certificate of deposits, term deposits, among others.

Liquid Fund Assets

The assets invested in Liquid Funds have a lower maturity period, which is generally less than 91 days. This allows you to enjoy the liquidity of your investments.

What Is The lock-in Period For Liquid Funds?

Most Liquid Funds have a minimum lock-in period of 3 days. You can receive your liquidated money in your bank account as quickly as within 24 hours.

What Is The Expense Ratio Of Liquid Funds?

Expense Ratio is the charge levied by a fund house for the management of your investments. The Expense Ratio for Liquid Funds is comparatively lower than regular Mutual Funds and ranges between 0.6-1%.

Benefits Of Liquid Funds

  • A majority of Liquid Funds have no lock-in period
  • Want money in a hurry? You only need to wait for 24 hours once you request a withdrawal before 2 pm on a business day.
  • Liquid Funds generally offer the lowest interest rates among all Debt Funds
  • Liquid Funds generally have no entry and exit loads.

Taxes On Liquid Funds

If you choose to invest in Fixed Deposits, any returns you receive will be taxed according to your tax bracket based on your income.

But if you choose the dividend option in Liquid Fund investments, your returns will be completely tax free.

In case you choose the growth option for your investment, you will need to pay short-term capital gains tax at around 11.26% if you are invested for less than 1 year. Remain invested for longer than 1 year and the tax rate will be around 22.2%.

Additional Reading: Types of Mutual Funds

Top Liquid Funds As Ranked By CRISIL

CRISIL is a leading rating’s agency that provides rankings, analysis, research as well as risk and policy advisory services.

The following Liquid Funds had a CRISIL ranking between 1 and 3:

  • SBI Premier Liquid – RP (G) – CRISIL Ranking # 3

This fund is an open-ended scheme launched in March 2007. The SBI Premier Liquid Fund requires a minimum investment of Rs. 50,000.

  • ICICI Pru-Money Market Fund (G) – CRISIL Ranking #1

The ICICI Pru-Money Market Fund is a suitable investment option for those investors who are looking for short-term savings solutions. This fund has an application amount of Rs. 5,000 with a minimum additional investment of Rs. 1,000. Want to withdraw funds? The ICICI Pru-Money Market Fund has a minimum withdrawal amount of Rs. 500. You can also invest in this fund through a Systematic Investment Plan.

  • DSP-BR Liquidity Fund – IP (G) – CRISIL Ranking #1

This fund has performed rather well among other Mutual Funds. The DSP-BR Liquid Fund is an open-ended scheme offering low risk and high liquidity. You need to invest a minimum amount of Rs. 5,000 in this scheme.

  • HDFC Liquid Fund – CRISIL Ranking #2

HDFC’s Liquid Fund aims to increase income, giving you a high level of liquidity. This scheme is ideal for investors who want a good income over a short tenure from investments in money market and debt instruments.

Liquid Funds are a great investment option that offer high returns over a short-term period along with quick liquidity.

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