NRIs should definitely invest in liquid funds. They are a good alternative to conventional saving methods. Due to their exceptionally short lending tenure, these funds are the safest of all mutual fund categories. They are suitable for saving money for unforeseen expenses. If one invests for at least a month, there is almost no possibility of losing money. They have provided returns that are up to 50% to 100% more than those of a savings account.
What are Liquid Funds?
Liquid funds are debt funds that invest in short-term assets like commercial paper, government securities, treasury bills, and REPOs. Liquid funds are only permitted to invest in debt and money market instruments with maturities of up to 91 days, under SEBI regulations.
Who Should Invest in Liquid Funds?
For investors who require quick access to their money and wish to store it for a brief amount of time, liquid funds are excellent. They can invest in a liquid fund and receive substantially better returns than leaving their extra money in a savings account. Some instances of excess funds are bonus payments, performance-based incentives, and other pertinent earnings from the sale of capital goods. Equity funds may be purchased using liquid funds as a medium of exchange. You might put the money in a liquid fund at first and gradually move it over a set length of time to an equity fund of your choice. This makes liquid funds perfect for NRIs.
Reasons to Invest in Liquid Funds
- Liquid funds have a high level of liquidity and no lock-in period. Investors have the option to redeem their money at any time.
- Low risk: Compared to other debt funds, liquid funds have one of the lowest interest rate risks due to the short-term nature of the underlying securities.
- Easy redemption: Highly liquid mutual funds can be quickly redeemed. Requests for redemption are typically handled in a single working day. The majority of liquid funds also provide quick redemption access for withdrawals up to Rs. 50,000 per investor per day per program.
- Potential for higher returns: Compared to savings accounts, liquid funds may offer higher returns.
Liquid Fund Taxation
Like other debt funds, liquid funds are subject to taxation. When liquid assets are held for less than three years, gains are categorized as short-term capital gains (STCG) and are taxed in accordance with the investor’s income tax bracket. In contrast, if they are kept for more than three years, they are considered long-term capital gains (LTCG) and are subject to a 20% tax rate plus the advantage of indexation.
How to Select a Liquid Fund?
- Check the track record of a liquid fund for consistently strong performance and high portfolio quality while reading the offer document.
- Do have a look at the expense ratio of these funds because, ceteris paribus, a fund with a lower expense ratio is more likely to have higher returns.
- Verify the credit quality and liquidity of the fund’s investment portfolio for both the short- and long-term. Always choose a fund with a proven track record and avoid any that have experienced credit events or other liquidity-related concerns in the past. The primary goal of investing in a liquid fund is not asset growth but rather effective short-term cash management.
- Keep in mind that investing in liquid funds has many benefits, one of which is the high level of intrinsic liquidity that they provide.
Liquid Fund Risk
Due to the 91-day maturity of the assets that the liquid funds invest in, these funds do not experience high volatility. As a result, compared to other kinds of debt funds, the net asset value (NAV) of liquid funds remains more stable. As a result, it is claimed that investors who are afraid of taking risks should use these mutual funds.
But even liquid funds have some risk, just like any other type of investment. The NAV of the fund could vary if the credit ratings of the underlying securities change in any way. Consequently, even liquid assets are not entirely risk-free. However, the underlying securities’ brief maturity time significantly reduces the risks involved.
Liquid funds by definition allow investors to park their money for a brief amount of time without a lock-in period and extract it whenever they like. Top liquid funds have no exit loads and are less risky than ultra-short-term funds. Due to their residual maturity of up to 91 days, these are frequently preferred by young investors. Whether you are parking in liquid funds for growth or for reinvested profits depends on your investment goals. The best liquid mutual funds are the ideal choice for all of your NRI investment requirements for immediate financial benefits because of their basic nature.
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FAQs
Liquid funds are debt funds that invest in short-term assets like commercial paper, government securities, treasury bills, and REPOs.
For investors who require quick access to their money and wish to store it for a brief amount of time, liquid funds are excellent.
Even liquid funds have some risk, just like any other type of investment.
You can invest in a liquid fund and receive substantially better returns than leaving your extra money in a savings account.
