Liquid Funds- An Ideal Option for Short Term Investments

Investment

oi-Monika Nihalani

By Monika Nihalani

Published: Tuesday, September 13, 2011, 12:26 [IST]

For years now, savings accounts have been the popular choice for those seeking to park their liquid cash. Considered a safe bet, they have not lost their shine amongst investors, despite their meager returns. Now here is an attractive alternative to park your short term funds. Liquid funds are an ideal option for that extra bit of money you have as, not only do they offer a better yield, they are easy to liquidate too. So how do liquid funds work and where is your money actually invested? Read on to understand more.

Investing in Liquid Funds
Liquid funds are debt mutual funds, which invest your money in short term money market instruments, such as certificate of deposits, commercial paper and treasury bills, all of which have maturities of less than a year. A recent study done by a leading credit agency, stated that in the last five years, the post-tax annualized returns of a liquid fund was around 5.78%, in comparison to savings account which yielded just around 2.5%.In the last one year alone, liquid funds have generated a return between 7 to 8%.The scheme aims to provide modest returns to investors, along with the availability of quick liquidity. Most funds could be redeemed in a day or two.

Key Features

• A lock in of a maximum of three days to even a week or a month exists to protect against any procedural glitches.
• No entry and exit load. An exit load is however applicable if the fund is redeemed before the lock in period.
• Minimum investment ranging between Rs 1,000 to Rs. 5,000 depending on the fund.
• Two kinds of funds exist, pure liquid funds and the liquid plus fund. Liquid Plus funds come with a longer tenure.
• Tax aspect: Returns are tax free in the investors" hands, if the dividend option is taken. There is a dividend distribution tax of 28.33 % on liquid funds and 14.16 % on liquid plus funds, for individual investors. Short term capital gains (if sold within a year) and long term capital gains (if sold post a year) is applicable.