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Liquidity Funds - A smart parking spot for your surplus cash

megha , Last updated: 24 August 2016  
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Not too happy with the 4% return on your Savings bank a/c?

Time to meet your new partner- Liquidity Funds!

Homo sapiens have always been accumulators. As the ‘Smart Ape’ evolved we started gathering precious stones, metals and with time we developed a love for the jingling sound of coins. Since then cash has been dear to us.

The coins which were kept in earthen pots being buried in corners of the households for safety soon knocked the vaults of banks.  The saver felt blessed with Savings Bank Account which promised safety & liquidity at its best. Today money in an SB a/c is as good as cash in hand.

Though a Savings Bank a/c lends liquidity and even some interest on the deposit, there is a need to keep exploring options where we can park our surplus money without making a dent on the safety & liquidity.

Enters Liquid Funds aka Money Market Mutual Funds...

Liquid funds are simply debt mutual funds that invest depositor’s money in very short-term market instruments such as treasury bills, government securities and call money that holds the least amount of risk. These funds can invest in instruments up to a maturity of 91 days. The maturity is mostly much lower than that.

Let’s know the new blue eyed boy in the MF industry better: FAQs

How safe are Liquid funds?

The key features of LF’s are:

  • The investment is made in high-quality debt instrument (zero equity)
  • The returns do not fluctuate violently unlike Equity or other Debt funds

The funds are SEBI regulated and can be put only in specific products along with allowable limits.

The restrictions include:

  • Not more than 10% into unrated debt
  • Not more than 30% of its funds in money market instruments of a single issuer 
  • Not more than 30% of its funds in one sector etc (the list is not exclusive)

How about market volatility?

It’s an established fact that price of a debt instrument (mid & long term) particularly bonds is inversely proportionate to the interest rate movements in an economy.  Since the liquid funds are invested in instruments having the maturity of up to 91 days, there is least exposure to changes in interest rates.

How LF’s will affect my tax liability?

Income from Liquid Funds is taxed under Capital Gains head. When sold before 36 months i.e. 3 years of acquisition, it attracts STCG tax and the STCG is clubbed with your overall income and attracts the tax rate applicable to your highest tax slab rate. LTCG is attracted when the investment is held for a period more than 3years & sold thereon (taxed at 10% without indexation & 20% with indexation). The dividend received on the Liquid Fund investment is tax-free in the hands of the investors, however the fund house shall deduct upfront dividend tax of 28.3%. 

What returns can I expect from LF’s?

 Find below the list of top 3 LF’S, rated on the basis of CRISIL ranking as on 31st June 2016;

 

The statistics are quite impressive. Most of the Liquid Funds have been yielding in of 6-9% p.a.which is approximately double as compared to the return of 4% one gets on deposit in the SB A/c.

How liquid are the Liquid Funds?

These special funds usually do not have a lock-in period in most instances. The maximum lock-in in most cases is 3days to provide a cushion against banking glitches. The withdrawals are usually processed in 24 hours on business days with cut-off time being 2:00 p.m.

If you submit a request for redemption on a business day by 2:00 p.m. the request shall be processed and your bank a/c shall be credited with the amount by 10:00 a.m. on the next business day.

While money in Savings Bank A/cs is good as cash in hand, we can manage our personal finance better by using a matrix of deposit in SB A/c & Liquidity funds.


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megha
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