Understanding Liquid Funds: A Beginner’s Guide

Investing can be a tricky process, especially for beginners. Among the myriad investment options, liquid funds are a relatively safe and accessible choice. In this beginner’s guide, we’ll break down what liquid funds are, how they work, and why they might be suitable for those just starting their investment journey.

What are Liquid Funds?

It is one of the mutual fund instruments that always invests in debt and money market securities. These securities are commercial papers, bank term deposits, treasury bills, certificates of deposits, etc. In addition, these best liquid funds come with a tenure of 91 days without a lock-in period. This means an investor can withdraw their money anytime.

Benefits of Liquid Funds

Liquid funds offer many benefits to investors. They are: –

  1. They are a budget-friendly option

Among all the debt funds, liquid funds are cost-effective solutions as they need low maintenance. This means their expense ratio is below 1%, which indicates high returns.

  1. Quick access

The withdrawals of liquid funds can be approved within a day and sometimes instantly.

  1. Safety comes first

Liquid funds are low-risk options as they offer consistent returns despite of volatile market. This means they stay steady without much fluctuation.

  1. Your time and your way

It comes without a lock-in period that shows it’s the wish of an investor how long to invest.

Who should invest in Liquid Funds?

According to experts, liquid funds are best in a few situations that also exit load on mutual funds. Assume that you got a big bonus or payment from any vendor. In this case, the individual will think about which platform they should invest their money to get high returns. Here, the best option is liquid mutual funds. That means, until you decide where to invest the money, liquid funds will be the temporary instrument for the short term with high returns.

Another situation where a liquid fund might be useful is when considering setting up a Systematic Withdrawal Plan. This plan lets you take out a fixed amount of money regularly, almost like a monthly payment. It can be a smart way to create an extra source of income, helping you cover your regular household expenses. So, in simple terms, liquid funds offer a flexible and temporary home for your money, especially when you’re not ready to make a long-term commitment or plan to create a steady income stream for yourself.

Tax Implications on Liquid Funds

In this investors will get capital gains and dividends as returns. But the dividends they will get are tax-free, while capital gains are taxable. This means if the gain is short-term, like up to 3 years, the tax is based on the investor’s income tax slab. On the other hand, if the gains are for over 3 years, it is known as long-term gains, and investors have to pay as per their own tax slab.

The Bottom Line

  • Liquid funds are the reliable choice among all debt funds.
  • They are food alternatives for short-term bank deposits.
  • Their low-risk nature, liquidity, and stable returns make them attractive for short-term goals and emergency fund parking.