What is Liquid funds? & which are those best liquid funds where we can park our Suplus Money.
If you got Liquid Cash in your hand, you either keep it in a savings account or in fixed deposit, but we can Explore more options for such requirements like Liquid funds. Today I will try to disclose more basic details in this blog post about Top 5 best liquid funds to invest in 2018.
We keep our idle money in saving accounts, but we can go with other options that are available for this choice like liquid funds , that can give us more returns than our traditional saving accounts, and with the same liquidity as we enjoy in our Saving Account today.
Your money that lies in a savings bank account that fetches you 4% interest p.a. Even some banks may offer a higher interest rate of 6%.
But the best liquid funds have given returns as 7.5-8% on an average in the past 1-year period.
On returns alone, liquid funds score over a savings bank account.
Now, the Question arise what a liquid Funds is actually and how they work
What is Liquid Fund ?
Liquid funds are Money market Mutual fund and invest in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the aim of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment.
They invest in Money market securities that have residual maturity of less than or equal to 91 days.
It helps the fund managers of liquid funds in meeting the redemption demand from the investors.
NAV of the Liquid funds computed for 365 days, unlike other debt mutual funds where Nav calculated based on business days.
With other debt funds for purchase applications received within the cut-off time (3.00 P. M) having the value up to Rs.2 lakhs, the NAV as at the end of the day of the application applied. For applications of more than Rs.2 lakhs, within the cut-off time (i.e. 3.00 P.M.) the allotment of units is subject to realization of funds.
However, with liquid funds, for all transactions (irrespective of the value of the investment) received within the cut-off time (i.e. up to 2.00 P.M.). where money also realized within the cut-off time, the units allocated as per previous day NAV.
Let us say if a purchase transaction in a liquid fund submitted on Monday before 2.00 P.M. and amount also realized by 2.00 P.M. on Monday, then NAV on Sunday is applicable.
When redemption request submitted before cut-off time on Friday, then applicable NAV for redemption is of Sunday, i.e. the day before the next business day.
This means, your investments generate returns for every single day of investment.
Liquid funds as a substitute for saving account….
The first things we Indians like to do, when individuals turn to 18 years of age. We first get the savings account open in our bank before taking a voter ID card.
We Indians like to keep money in a savings account. However, we also have other options where we can get a higher rate of interest, and the safety or liquidity is the same as we get into the savings account.
To satisfy our daily needs, we keep money in the saving accounts, from where we get 4-6% interest annually. But on the same interest, we also need to pay tax. Whatever interest you get from the bank, adds to your tax liability and you must pay tax based on your tax slab (However, deduction under section 80TTA is allowed on interest from savings account with a maximum of Rs. 10,000/- per year)
Whereas, you can get more benefit of liquid funds in terms of return & tax implications.
What is so special about Liquid funds
Till date, when you take money out of liquid funds, you get the money in 1 day, but now from liquid funds you can redeem the money in a matter of minutes, with the help of technology.
But SEBI has capped this limit to Rs. 50,000 a day or 90% of your folio’s value, whichever is lower. (How can you redeem liquid mutual funds )
Tax implication on liquid funds
Indexation benefit after 3 years
After three years of investments, a long-term capital gains tax is levied on debt funds at 20% with indexation. Indexation is adjusting investments for inflation for holding period. The longer the hold period, the higher the benefit of indexation.
Let’s assume, 3 years ago, say on 20th January 2014, a person invested Rs. 1,00,000 in liquid funds, when he redeemed on 20th January 2017 (after three years) he got Rs. 1,27,729. His total gain was Rs. 27,729 but after adjusting for indexation (adjusting for the inflation during the investment period; 2014-15 CII was 852 and 2016-17 CII was 1081), his taxable gain was only Rs. 851 (1,27,729-100,000*1081/852), then investor need to pay tax only (851*20%)=170 Rs.
The indexation benefit is not available on saving account, FDs and RDs, it is only available on debt mutual funds if the holding period is more than 3 years.
In summation, these funds are a good substitute to regular saving account.
since the liquidity is high, giving more returns than regular saving account and have taxation benefits. Therefore, investors can invest their emergency funds in liquid funds.
If you choose dividend option in a liquid fund.
Dividends received under liquid plans are not taxed at the hands of resident individual investors, but fund houses pay dividend distribution tax @28.325 percent (including surcharge and cess).
But after Budget 2018 DDT on all non-equity funds such as money market, liquid, and debt funds are 25 percent plus 12 percent surcharge plus 3 percent cess, totaling to 28.84 percent.
So, as I have shared above specific details, let me brief key major benefits to invest in liquid funds
Higher Returns: Your money that lies in a savings bank account fetches you 4% interest per annum. Few banks offer a slightly higher interest rate of 6%. However, the best liquid funds have returned around 7% on an average in the past 1-year period. On returns alone, liquid funds score over a savings bank account.
Redemption ease: These mutual funds have no lock-in period. Also, the withdrawals are process instantly, and investors receive the amount within a half an hour in most of the liquid funds, thanks to technology.
Tax Efficient: Here, the long-term capital gains (more than 3 years) are taxed at 20% after indexation, while short term capital gains are added to your income and taxed at the normal rate applicable to you.
No Loads: Most liquid funds do not have any entry or exit loads.
Low risk: Liquid funds have the lowest interest rate risk among debt funds as they primarily invest in fixed income securities with short maturity.
Factors to be considered for top 5 best liquid funds in 2018….
Here’s what I have selected from liquid funds, which we can invest in 2018, I have selected them by taking into account some necessary parameters.
Which are following: –
- AUM (Asset under management): Liquid fund Aum should be more than 10,000 crores. I believe that the size of the fund portfolio can give us an indication of how the fund’s liquidity will be. The larger the fund size, operating cost of the fund will be less.
- Expense ratio: – Fund expense ratio should be less, that is the expenses which the fund manager charge with your return to manage the fund, that is why we always recommend go with direct fund option only. It will bridge the gap between you and AMC, a broker who involves in this transaction makes a hefty amount of commission in regular mode option.
- Average Maturity: – This figure, represented in day or years, gives the average maturity of all the instruments held in the portfolio. The average length of maturity for all fixed-rate debt instruments held in a portfolio. A bond fund or mutual fund with a short average maturity is more sensitive to current interest rate fluctuations than one with longer average maturity.
- Credit Quality: – Average credit quality gives a snapshot of the portfolio’s overall credit quality. It is an average of each bond’s credit rating, weighted by the relative size of the portfolio.
- An investor should always focus on the credit quality of the bond or instruments, Mutual Funds should focus on the highest credit quality exposure, which is defined by A1+ short-term ratings. Any ratings lower than these could potentially expose the portfolio to liquidity risk in extreme market conditions.
- The best short-term rating in the Indian context is A1+ translating into A+ rating in the long term. Only highest A1+ ratings would ensure the highest credit quality.
On the basis of all the parameters which we had discussed above, we have selected the Best 5 liquid funds.
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