Reasons behind the popularity of liquid funds

If you want an alternative to fixed deposits, then liquid funds are the answer. They are a kind of debt mutual funds that give their investors the opportunity to lock their investment for a short period of time. At the time of redemption, investors will not be asked to pay any extra exit fees and can redeem their units for cash whenever they like. There are more reasons that contribute to the popularity of liquid funds, and some of them are mentioned below:

Inflation Period: When inflation is prevailing in the market, liquid funds are the best choice for investment. The liquidity is tightened and a high-interest rate is maintained by the RBI. So, this means that good returns are bound to be released on liquid mutual funds.

No-Lock In Period: If a person wishes to exit from the scheme, then they can request a withdrawal, which will process in 24 hours. However, the cut off time for withdrawal from the scheme is 2 PM, so any requests after that will be entertained from 10 AM the next day. There are no entry and exit loads in liquid funds.

Least chances of risks: With the majority of investments being in government securities, liquid funds have a maturity period of maximum 91 days. So, the risks associated with these funds are comparatively minimal. The short amount of time of investment eliminates the risks of credit fluctuations, which are bound to affect investments.

Tax Benefits: There is no need for investors to pay tax on dividend income from liquid funds. However, if the investor redeems his units for more than what he invested, then those capital gains will be taxable. An investor can earn short-term capital gains if he invests for upto or less than 3 years, which will be taxable as per his position on the income tax slab rate. If the investor redeems the units after 3 years, then it will be called as long-term capital gains upon which he will get a benefit of “indexation”.

Returns: If you, as an investor, want to measure the performance of the fund, then you should opt for at least a three-month return period. Liquid funds are especially advisable only for short-term investment. In 2019, the best returns on liquid funds offered an interest rate of around 7%-9%, which is comparatively higher than savings account returns.

High Liquidity: Liquid funds, as the name suggests, are highly liquid due to their short-term investment system. So, the redemption of investment as per the investor’s convenience is a big advantage, unlike the case for any other investment instrument.

These are some of the top reasons that have contributed to the popularity of liquid funds. These are some of the advantages that only liquid funds have been able to offer and no other investment instruments. So, in case you were wondering ‘what are liquid funds?’ and ‘why are they beneficial?’, the answer can be found in this article. It is one of the top performing mutual funds in India.

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Written by shaheen shaikh

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