Should you invest in Liquid Funds?

Prashanth Menon

26 May 2017

New Page 1

Liquid Funds are a popular investment option to park your surplus money for a brief period of time, at a rate of interest which is higher than what a bank generally offers. This is an open-ended debt scheme which invests in treasury bills, money market instruments, commercial paper and certificate of deposits for up to 91 days.

There are a number of factors which make Liquid Funds an attractive option.

Lower risks

To begin with, Liquid Funds are supposed to be least risky as they hold high quality papers. Among the different categories of debt funds, liquid funds have the shortest maturities. They earn returns from the accrual on the instruments and these funds do not involve trading.

Liquid Funds are often compared with Ultra short term funds. However, the two are different on many counts. Firstly, the maturity period for the Ultra short term fund is more than three months and often goes up to a year. Ultra short-term funds are a riskier preposition on the basis of the quality of papers they hold. Furthermore, Liquid Funds do not charge an exit load, whereas Ultra short-term funds put an exit load on the investor.

Better returns

In general, Liquid Funds give returns of over 6-8%. Compare this to the average 4% rate of interest offered by most banks for savings account. The better returns easily make it an obvious choice from an investor’s point of view.

Easy liquidity

There is no exit load charged on liquid funds. In fact, there are now provisions in some funds that allow an investor to redeem their funds within a few hours. Hence, the process that used to take a couple of days earlier is now complete within some hours. Overall, on the basis of the cut-off schedule for redemption, an investor receives money the next day.

Taxation

Liquid funds are taxed like any other debt fund. When profits are realized in less than three years, the same are taxed as per your tax rate, while the profits realized after three years are taxed at 20% with indexation. Investors who come in the 30% tax bracket can opt for a dividend payout if they require cash on a regular basis.

Conclusion

Liquid Funds give an investor the option of investing their capital for a very short duration of time at an attractive rate of interest. The option of redeeming the funds within a span of some hours makes the investment option a very lucrative one.

These funds are best suited as a contingency fund where you can set aside some amount of your investment by a creating a contingency fund.

This route also works well when an investor wants to invest lump sum money and then, in course of time, transfer it systematically it to equity funds. In general, it is not advisable to invest lump sum in equities market at a time when the markets are volatile or are richly valued. Liquid Funds can be a useful tool during such times as money can be parked here with an instruction for STP into an equity fund at regular intervals. By doing so, an investor can protect the investment against the volatility and, at the same time, the money is already invested in an option that gives better returns.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Should you invest in Liquid Funds?

Prashanth Menon

26 May 2017

New Page 1

Liquid Funds are a popular investment option to park your surplus money for a brief period of time, at a rate of interest which is higher than what a bank generally offers. This is an open-ended debt scheme which invests in treasury bills, money market instruments, commercial paper and certificate of deposits for up to 91 days.

There are a number of factors which make Liquid Funds an attractive option.

Lower risks

To begin with, Liquid Funds are supposed to be least risky as they hold high quality papers. Among the different categories of debt funds, liquid funds have the shortest maturities. They earn returns from the accrual on the instruments and these funds do not involve trading.

Liquid Funds are often compared with Ultra short term funds. However, the two are different on many counts. Firstly, the maturity period for the Ultra short term fund is more than three months and often goes up to a year. Ultra short-term funds are a riskier preposition on the basis of the quality of papers they hold. Furthermore, Liquid Funds do not charge an exit load, whereas Ultra short-term funds put an exit load on the investor.

Better returns

In general, Liquid Funds give returns of over 6-8%. Compare this to the average 4% rate of interest offered by most banks for savings account. The better returns easily make it an obvious choice from an investor’s point of view.

Easy liquidity

There is no exit load charged on liquid funds. In fact, there are now provisions in some funds that allow an investor to redeem their funds within a few hours. Hence, the process that used to take a couple of days earlier is now complete within some hours. Overall, on the basis of the cut-off schedule for redemption, an investor receives money the next day.

Taxation

Liquid funds are taxed like any other debt fund. When profits are realized in less than three years, the same are taxed as per your tax rate, while the profits realized after three years are taxed at 20% with indexation. Investors who come in the 30% tax bracket can opt for a dividend payout if they require cash on a regular basis.

Conclusion

Liquid Funds give an investor the option of investing their capital for a very short duration of time at an attractive rate of interest. The option of redeeming the funds within a span of some hours makes the investment option a very lucrative one.

These funds are best suited as a contingency fund where you can set aside some amount of your investment by a creating a contingency fund.

This route also works well when an investor wants to invest lump sum money and then, in course of time, transfer it systematically it to equity funds. In general, it is not advisable to invest lump sum in equities market at a time when the markets are volatile or are richly valued. Liquid Funds can be a useful tool during such times as money can be parked here with an instruction for STP into an equity fund at regular intervals. By doing so, an investor can protect the investment against the volatility and, at the same time, the money is already invested in an option that gives better returns.

Have Referral Code?