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 such as liquid funds, today we will discuss Top 5 best liquid funds to invest in 2018.
Today, we keep our idle money in savings account, but we have other options available for this choice, which can give us more return from the savings account, and with the same liquidity as we get in the bank account.
Your money that lies in a savings bank account fetches you 4% interest p.a. Some banks offer a higher interest rate of 6%. But the best liquid funds have returned as high as 7.5-8% on an average in the past 1-year period.
On returns alone, liquid funds score over a savings bank account.
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 get a higher rate of interest than the bank, 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 savings account, on which 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 have to pay tax based on your tax slab.
However, you can get more benefit of liquid funds in terms of return & tax implications.
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, give 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).
How I shortlisted top 5 best liquid funds for 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
top 5 best liquid funds to invest in 2018.
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