Why Liquid funds are like bank deposits or even better
Why Liquid Funds Are like Bank Deposits or Even Better
Liquid funds are low risk mutual funds which invest in debt securities with less than 91 days residual maturity. Returns on liquid funds are similar to fixed deposits. For instance in the last 1 year, liquid funds regular plans gave returns of 7.71% and direct plans gave returns of 7.86 which are similar to FD rates.
However the liquidity in these funds is better than FDs and similar to savings deposits. Investors can enter and exit liquid funds at any time without any entry or exit costs/loads. Partial withdrawals are possible. And if requests for withdrawals are placed before 2pm, money will be credited to your bank account by 10am next day.
Taxation is also similar or slightly better than bank deposits. Interest from bank deposits is added to income and taxed at applicable income tax rate. For liquid funds, units held for less than 36 months are taxed at normal rate of income tax. Units held for longer then that are taxed at 20% after indexation. Any dividends received are not taxable in hands of investor but fund has to pay dividend distribution tax @28.84%. So investors in 30% tax bracket can choose, dividend plans, while investors in lower tax brackets can go for growth plans, redeeming units when income is needed. Also unlike bank deposits, mutual funds do not deduct TDS.
Liquid funds can be considered slightly most risky than bank deposits in two ways: every depositor in a bank in insured by up to a limit of 1lakh. However this should not matter for most investors. Also in liquid funds, fund manager has some discretion (though very limited) to invest in other instruments to earn slightly higher returns. This risk can be reduced by choosing your liquid fund carefully – selecting a fund with long track record, high AUM and also reading the prospectus to understand limits on fund manager discretion.
You can invest in direct plans (commission-free) of liquid funds through ORO. ORO does not charge any convenience fee for investing in liquid funds
Created by Orowealth.com