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HOW TO CHOOSE THE BEST LIQUID FUNDS FOR INVESTING IN 2021
Liquid funds are among the most frequently invested mutual funds. You might be wondering why! The reason for that is simple - liquid funds are more popular among firms and businesses than among individual investors. Let’s define cues that can help identify the best liquid funds to invest in 2021 for you to invest in.
What are Liquid Funds?
Coming under the category of debt funds, liquid funds invest in fixed-income assets that mature within 91 days, such as certificates of deposit, Treasury bills, commercial papers, and other debt instruments. There is no lock-in period with liquid money. On business days, liquid fund redemption requests are completed within 24 hours.
Liquid funds have a relatively low-risk profile and are the least hazardous of all debt fund types since they primarily invest in high-quality fixed-income securities with short maturities. As a result, risk-averse investors will likely seek the best liquid funds to invest in.
As an investor, there are a few things to think about.
If you are looking to invest in the best liquid funds, then you should consider the following factors:
1. Objectives of the Fund
Among all debt fund categories, liquid funds are the least hazardous. Because the underlying assets have a maturity term of 60 to 91 days, the NAV (net asset value) does not change much. What’s more, the NAV of liquid funds is not affected by underlying asset price movements. However, there is a possibility of a sharp decline in NAV due to sudden drops in the underlying security's credit rating. Liquid funds, in plain terms, are not completely risk-free but are a lot safer than many other investment instruments.
2. Anticipated Returns
Liquid funds have historically delivered 7% to 9% yields, which is significantly greater than the 3.5 per cent interest rate offered by a traditional savings account. Even though liquid funds' returns are not assured, they have historically provided positive returns at the time of redeeming.
Liquid funds, like other mutual funds, charge an expense ratio to manage their investments. The Securities and Exchange Board of India (SEBI) has set a limit of 2.25 per cent for these cost ratios. Liquid funds retain a lower cost ratio to give comparably better returns over a short period, owing to the fund manager's hold till maturity strategy.
4. Horizon of Investment
Liquid funds are used to invest excess capital for a short period of time, such as three months or less. The underlying securities' full potential can be realised faster with such a limited time horizon. If you have a one-year investment horizon, ultra-short-term funds may be a good option for you.
5. Financial Objectives
Liquid cash may be quite beneficial when it comes to building an emergency reserve. Because there is no lock-in period, you may access your funds quicker for an emergency requirement.
Taxation of Liquid Funds
If you get dividends from liquid funds, they will be added to your overall income and taxed according to your tax bracket. The capital gains offered by liquid funds are subject to the same taxes regulations as debt funds.
Likewise, when you redeem your investment within three years after the date of allocation, you earn short-term capital gains. These profits are added to your income and taxed according to your tax bracket. When you sell your debt fund units after three years, you earn long-term capital gains. After indexation, these profits are taxed at a rate of 20%.
What are the Benefits of Investing in Liquid Funds?
The following are some of the advantages of investing in liquid funds in India today:
1. Guaranteed Returns
Because liquid funds engage in debt securities with a set interest rate, the returns on these investments are predictable. When the securities mature, the investor receives the original amount plus the set interest rate offered by the instruments.
2. Exceptional Liquidity
Liquid funds are extremely liquid due to the short maturity terms of the underlying investment securities. The invested capital can be redeemed whenever it is convenient for the investor. Investment in liquid funds has no lock-in period.
3. There is no exit load
A benefit of the fund's high liquidity is that there is no relevant exit load when you withdraw the deposited cash after 7 days.
4. Lower risk
Liquid funds' investment portfolio is made up of short-term money market products. The greatest maturity of any invested investment is three months, essentially protecting the portfolio against fluctuations in interest rates.
5. Higher Rates of Return than Savings Accounts/Fixed Deposits
Liquid funds are gaining popularity among investors due to their potential to provide better returns than bank fixed deposits or savings accounts. Owing to this, they are viewed as a superior alternative to savings accounts. Liquid funds have provided returns of 7-9% throughout the years, which is substantially better than the 4-5% rates offered by Savings Accounts.
Time to be a smart investor; time to go for liquid funds.