Liquid fund is a type debt fund which invests in debt and money market instruments such as commercial papers, call money and government securities, treasury bills etc, which feature a maturity period of up to 91 days.
Benefits of liquid funds
Least Risk - liquid funds carry least amount of risk as they invested in short maturity period debt paper and mostly invest in high credit ratings.
High Returns - Liquid Funds offer returns ranging between 7%-8% over long-term periods of 3-5 years which are higher than bank savings interest rate.
High Liquidity - Liquid funds provide unmatched liquidity to investors since money remains invested for short period of time. On redemption your proceeds from liquid funds are credited in 1-2 days.
Instant redemption - Some liquid funds offer facility of instant redemption. This means that on placing a redemption order online you immediately get the proceeds in your bank account. However, there is limit of Rs 50000 capped or 90% of portfolio value, whichever is lower.
Who should invest in Liquid Funds?
Investors who are looking to park money for short period of time bearing least amount of risk, should go for liquid funds. liquid funds offer better returns than savings accounts.
How are liquid funds taxed?
Being a type of debt funds, liquid funds attract capital gains tax. The rate depends on holding period.
New SEBI valuations matrix:
Come April 2020, liquid funds will be more volatile and at the time safer. SEBI has introduced new valuation metrics to be followed by AMC’s (asset management companies)
The proposed change pertains to the way liquid funds value underlying securities. The valuation of all instruments will now be entirely on mark-to-market basis. This means all securities in the portfolio will be valued at prevailing market price.
Till some time back, only bonds maturing after 60 days were valued at market price and for bonds with lower maturity, the difference between the purchase and redemption prices on maturity could be amortized or spread over the tenure of the instrument.
Bringing MTM (mark-to-market) on the entire portfolio will basically make the liquid fund portfolio transparent.
Apart from this the liquid funds will now be required to hold at least 20% in cash and cash equivalents like treasury bills and repo on government securities.
Further Liquid funds will hence forth introduce a graded exit load that will be levied on investors who exit the fund within seven days.
Comments