Last Updated on Jan 5, 2020 by James W
If you are on the lookout for short-duration investments, liquid funds are an appropriate option. To be precise, a liquid fund is an open-ended debt mutual fund scheme. This type of short-duration investment is primarily meant for capitalizing on money-market instruments. The maturity period of this type of investment funds is only 3 to 6 months. If you have some extra cash in your bank account, leaving it unutilized may not be the best bet. On the other hand, if you want to overcome inflation, investing in liquid funds is a viable option. Interestingly, the risk of default in Axis mutual fund is considerably low.
The applicability of the Net Asset Value (NAV)
When liquid funds are compared to other types of investment options in the category of debt, they are usually unique. For all transactions in the liquid fund, irrespectively of the value of investment, the units are usually allotted as per the last day’s NAV. However, note that such rule is applicable only when the application is received before the cut-off time which is 2PM. Furthermore, the liquidity factor is another enticing trait of these types of funds. It is because the redemption payouts are usually credited to the bank account on the very next day.
The working mechanism of a liquid fund
If you want to invest in the best liquid funds, you should be aware about their working mechanism. These types of investment options usually seek to provide a higher grade of liquidity and security of the principal to investors. Due to this reason, a manager of the fund invests in high-debt credit funds. Moreover, the allocated divisions comply with the investment objective of the fund.
Note that it is the duty of the manager of the fund to confirm that the usual development period of this fund should be 3 months. It also casts a positive effect on the thoughtfulness of the fund returns. For instance, the value of the fund doesn’t experience a variety of variations. Also, the development of the fundamental securities becomes coordinated with the portfolio maturity.
That is why a liquid fund aids to provide greater returns. Axis liquid fund is an outstanding choice to ensure that your money isn’t lying idle. This type of liquid fund is also not that risky and guarantees higher returns when compared to a normal savings bank account. Another highlighting trait of investing in these types of funds is that there is complete absence of exit loads. In other words, you can extract assets when you wish.
Which individuals should consider investing in liquid mutual funds?
Those individuals should invest in these types of funds who have a substantial amount of cash lying idle in their bank account. These types of funds are also ideal for short-duration investments. So, instead of accumulating huge funds in a bank account, one should opt for a liquid fund. On the other hand, they can also be utilized as a medium for entering the world of equity funds.
Moreover, the liquid fund returns is also an enticing option which draws most investors towards it. If you are thinking of investing in an equity fund through a liquid fund, you have to firstly finance the cash in the liquid fund. After that, you have to carry out a methodical allocation to a fund of your choice in a designated time-period. This is also known as the right way to foray into the investment world of equity funds.
How should an investor select a liquid fund?
Liquid funds carry the lowest risk and volatility among mutual funds. The portfolio of these types of investment options comprise of tools that have a high credit rating. On the contrary, if you have a longer investment horizon of seven to eight months, you should opt for short duration investment options. As an investor, note that these types of investment options are not completely free from risks. Though the risk factor is low, these types of investment options carry with them a low level of risk. This is the reason that while investing in liquid funds; you have to consider various options. So, let’s explore the various intricacies of opting for the best mutual funds to invest.
- Historic Returns
While opting to invest in a particular liquid fund, you have to check its past performance. In other words, the track record of the fund has to be quite clear
- The allocation of portfolio
The portfolio of the scheme and the allocation instruments has to be checked thoroughly
- The average maturity of the particular fund
Liquid funds have an average maturity period of 91 days. If you are investing in a liquid fund which reaches maturity before 90 days, it is wise for you to opt out of that fund. It is because these funds hold more cash which in turn gives less capital returns.
- The credit rating of that particular liquid fund
Note that the highest rating is AAA. Higher the ratings, fewer are the chances of risk and default
Earn taxable profits
When the investor opts to invest in liquid funds, you have the possibility to earn gains that are taxable. However, taxation rate usually depends on the time period of your investment in a particular liquid fund. Interestingly, the time-period through which you hold investments referred to as the holding period. For instance, the profits accumulated in three consecutive years are also referred to as short-duration capital gains. On the other side, if you have made gains over a period of three years, these types of gains are also known as long-duration gains. Note that the short-duration gains are usually supplemented to the income of the investor and are taxed as per the investor’s income slab.
Thus, it is evident that liquid funds are ideal when you want to invest your surplus cash which is lying idle. On the other hand, if you are in a higher tax bracket, liquid funds can prove to be more efficient in terms of tax. Liquid funds are also an ideal alternative to short-duration fixed deposits.