Investment in any product or instrument should ideally be viewed in a very personal way. However, this may not be true in most cases, and you often find investors in a quandary over their investment decisions. Investment is a planned and organized activity in which any investor must evaluate their distinctive financial goals before investing.
Lately, the investment in mutual funds has garnered much attention and several investors are drawn to it for its versatility and mitigation of risks. While mutual funds have appealed to the majority of investors in India, there may be a few who avoid them. This is because investors believe that mutual fund investment is a long-term strategy, with wealth being locked in for lengthy durations. Furthermore, extracting capital during an emergency may seem challenging to such investors. However, the best liquid funds in India have been introduced to overcome these hurdles and encourage more investment in mutual funds.
Liquid Funds – What They Are, Features, and Advantages
Once you grasp what liquid funds essentially are, their features which translate to their advantages, etc. you will be able to determine to whom these funds are best suited. Moreover, you will get a good idea of the best liquid funds offered today to match your own investment needs.
Fundamentally, the best liquid funds are mutual funds that invest in highly liquid instruments such as money market instruments and debt instruments. As funds must offer a high degree of liquidity at any point in time (when the investor wishes it), these funds are not invested in equity which is more geared toward long-term investment. Typically, such funds have a brief maturity tenure, only 91 days. These funds are touted to be one of the safest in the range of mutual fund categories, as they have a low duration of lending.
Here are some of the best liquid funds features and advantages that you can look forward to while investing:
- Emergency Corpus – Liquid funds are instruments that are suitable for putting capital aside to meet emergencies.
- Flexible Funds – Investors are able to withdraw money from liquid funds wherever there is a requirement for cash, such as a health emergency, for instance. While this is possible, liquid funds allow you to invest large amounts of capital when you have some spare cash on hand. Instead of letting it sit idle, you can invest it to build more capital. Liquid funds will have higher rates of interest than most banks will give you with a savings account. Furthermore, with the best liquid funds, there is no set minimum investment tenure in which you have to invest.
- Good Rates of Interest – Investors who place their capital in liquid funds are prone to earn substantial returns in the short term. If you compare the rates of interest of the best liquid funds, to those offered by most savings accounts, you will find you earn more.
- Tax Advantages – If you make investments in liquid funds, you get decent tax perks. The tax that applies to long-term capital gains is 20% (including indexation). However, taxes levied on short-term capital gains are based on any gains as part of the investor’s income. The regular and prevailing tax rate applies here and is levied based on the tax slab of the investor.
- Low Cost and Low Risk – Liquid funds are low in risk as they invest in debt instruments. Therefore, your principal is assured of remaining protected and you get opportunities for stable returns. In terms of cost, you also get benefits as these are low in cost. Typically, expense ratios of the best liquid funds are under 1%. This ensures that costs don’t make returns redundant for investors.
- Hedge to Combat Inflation – Your best bet in investment is a liquid fund if you want to hedge the big bad wolf that is inflation. As the Reserve Bank of India increases rates of interest in times of inflation, investors get benefits from investing in liquid funds.
- The Redemption is Fast – In the event, you wish to redeem your liquid funds, the best liquid funds are redeemable almost instantly. This is a great benefit and feature for any emergencies you may encounter. Redemption requests can be processed in a single day, and this is due to the fact that funds are invested in immensely liquid securities with the probability of lowered default.
Who should opt for the best liquid funds?
After reading about the features and benefits of liquid funds, it may be clear to you about who should invest in these. Liquid funds are for those investors who have risk tolerance levels that are low and don’t want stress in investment. Furthermore, liquid funds are suited to investors who may be saving for the short term and wish to build a corpus in the short run. They are also matched with people who foresee any kind of emergency expense coming up and want to build wealth for the same. Finally, investors who wish to reinvest their profits from some other investment, or have spare cash just lying idle can opt to invest in the best liquid funds.
The Taxation on Liquid Funds
A little information on taxation has already been touched upon in a previous section, but you will find more details here:
- Short-Term Capital Gains Tax – In case investors withdraw funds (redeem them) before a three-year term is complete, a short-term capital gains tax is applied to returns generated by the best liquid funds. The tax is applied based on the income bracket of the investor.
- Long-Term Capital Gains Tax – This is applied on returns from liquid funds which have been held for a period of more than three years. This stands at 20% of the income earned (with indexation included).
The Best Liquid Funds
The best liquid funds can be for any investor to sign up for. Even if you do not fall into any of the investor categories mentioned, you can still go in for the best liquid funds, as they give you portfolio diversification to balance out your financial standing.