What is Liquid Fund?

  • Liquid funds are debt funds that invest in instruments such as certificates of deposit, treasury bills, commercial papers, and other debt securities.
  • The Process of Nav calculation is also unique, it is calculated for 365 days instead of working days.
  • The fundamental advantage of investing in liquid funds is the high liquidity they offer.
  • The redemption of liquid funds is processed within 24 hours on business days.
  • Liquid funds possess the lowest interest risk among all classes of debt funds as they mostly invest in fixed-income securities that mature soon.

Who Should invest in liquid fund?

  • Liquid funds are ideal for investors who want to park their idle cash for a short term and earn decent returns from the same. Since liquid funds offer better returns than many savings accounts.
  • The accumulated corpus can be used to fulfill short term needs in the next 4-5 months.
  • One can also use Systematic Transfer Plan (STPs) to use the accrued capital in a liquid fund for SIP installment in an equity fund.

How are Liquid Funds Taxed?

Returns from Liquid Funds are taxed based on the holding period of invested capital:

  • If you withdraw the amount before three years of investment, Short Term Capital Gains (STCG) Tax as per the income tax slab of the investor. For instance, if an investor gains ₹10,000, via investment in liquid funds, ₹10,000 are added to income tax slab of the investor and taxed accordingly.
  • If an investor withdraws the investment including capital gains post 3 years of investment, Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.