All you need to know about

Liquid Mutual FundsAll you need to know about

Liquid Mutual Funds

#WiseWithEdelweiss

Liquid funds primarily invest in money market instruments such as call money, government securi�es (g-secs), commercial paper, treasury bills etc. which have a maturity period of up to 91 days. Liquid funds are ideal for those investors who want to park their cash for a short period of �me and need access to the cash at short no�ce.

How do liquid funds work?

The primary aim of liquid funds is to provide a high degree of liquidity and ensure capital protec�on. Here is how they work:

Ÿ Investments: Liquid funds invest in high-credit quality debt instruments such as cer�ficate ofdeposits, commercial papers, treasury bills, etc.

Ÿ Maturity: The fund manager ensures that the average maturity of securi�es that comprise thepor�olio is up to 3 months.

Ÿ NAV: Unlike some other funds, the Net Asset Value (NAV) of a liquid fund does not fluctuate much;this is because of low dura�on high quality securi�es that make up these funds.

Ÿ Withdrawals: Withdrawals from a liquid fund are typically processed in 24 hours.

Benefits of inves�ng in a liquid fund

Liquid funds offer the following benefits:

Ÿ No lock in: There is no penalty for withdrawing money from a liquid fund nor is there any lock-inperiod like a fixed deposit.

All you need to know about

Liquid Mutual FundsAll you need to know about

Liquid Mutual Funds

Ÿ Entry/Exit loads: There is no entry load. The exit load normally is Nil, however can be levied asmen�oned in Scheme Informa�on Document

Ÿ Lowest interest rate risk: Liquid mutual funds carry the lowest interest rate risk because of their highliquidity and investments in high credit rated securi�es.

Ÿ No taxes on dividends: Liquid fund dividends are not taxed in the investor's hands, but dividenddistribu�on tax applies.

Who should invest in liquid funds?

Liquid funds are ideal for people who have idle cash and are looking for short-term investments which generate higher return than a typical savings account. These funds can be used to funnel money into equity funds through a systema�c transfer plan (STP). STP offers a two-pronged benefit; first, it earns some returns on the money parked in the liquid fund and second, it helps average down the cost of investment in equity, thereby reducing risk related to equity investments. Further, investors who have received windfall gains or come into a large amount of money, but are undecided about where to invest it, can also use liquid funds to park funds for the short-term.

Tax Benefits

Liquid funds are classified as debt funds. Liquid fund returns are subject to capital gains tax, which is calculated on the basis of holding period.

The STCG tax impact can be reduced if you are in the highest tax bracket of 30% by op�ng for dividend reinvestment. In this situa�on, dividends are declared, but reinvested back into the fund. This results in lowering the capital gains while the reinvested dividends are considered as 'fresh investments'. However, for longer-dura�on investments, you should opt for growth op�on as you will get indexa�on benefits.

Liquid mutual funds have versa�le uses; they can act as an alterna�ve for savings accounts or be used to park funds that are yet to be invested or can even be used to create an emergency fund. These funds have a place in almost every investor's mutual fund por�olio.

Capital Gains Tax Holding Period Tax Applied

Short-Term Capital Gains Tax(STCG)

Less than 36 months According to Income Tax Slab

20% (with Indexa�on)*Long-Term Capital Gains Tax(LTCG)

36 Months or more

*Indexa�on takes into account infla�on and reduces tax liability