What do commercial papers, government securities, certificates of deposit, and treasury bills have in common? These all are securities that mature in 91 days and are usually purchased under liquid fund investments.
Before taking a deep-dive into this world, it is essential to know what is liquid fund. Liquid funds are mutual funds that invest in short-term securities, which mature within 91 days. They offer investors with various advantages such as:
Low Cost
These funds are generally low cost, and they usually operate with expense ratios below 1%. Such a structure allows liquid investment funds to provide adequate returns to investors.
Low Risk
Liquid investment funds are low-risk debt funds that provide investors with steady and safe returns. Thus, the values of such funds are reasonably unwavering across different interest rate cycles in the investment market. Compared to this, the funds that hold long-term maturing securities can fluctuate between making high capital losses when rates are increasing, to excellent capital gains when the rates are reducing.
Adaptable Holding Period
Liquid investment funds have a flexible holding period. However, a minimal exit load is charged for redemption within a week. Since these funds have a flexible holding period, it is simple to enter or exit the investment, whilst making steady returns for the length of the investment.
Higher Returns Compared to FDs and Savings Accounts
Liquid fund investments are gaining popularity with investors since they provide a higher rate of returns as compared to savings accounts and fixed deposits. Another reason why they are more attractive than savings accounts is the higher liquidity factor.
Due to the aforementioned benefits, it comes as no surprise as to why liquid funds have become immensely popular among investors. Apart from them, even novices who want to start investing, wish to begin with liquid fund investments. They might know what is a liquid fund, but they may not have an in-depth idea about the taxation rules related to it. So let’s take a look at the taxation rules concerning liquid fund investments.
Taxation on Liquid Investment Funds
Investors earn capital gains and dividends from liquid investment funds, and they do not pay any tax on dividend income received from these funds. In general, if investors earn capital gains, these gains are taxable. In this case, capital gains are divided into two scenarios:
- Short-Term Capital Gains
If a liquid fund investment is sold within a period of three years, it comes under the category of short-term capital gains. This gain is taxed at the tax slab rate applicable to the investor.
- Long-Term Capital Gains
If a liquid fund is sold or redeemed after three years, then the capital gain is treated as a long-term capital gain. In such cases, investors obtain the benefits of indexation, i.e. the price at which the funds were purchased is increased, taking into account inflation before the capital gain is calculated. The government of India taxes long-term capital gains at a rate of 20%.
Investing in Liquid Funds
There are specific criteria which you have to fulfill before investing in liquid funds, which include:
- Minimum Application Amount
It is the minimum amount of money that have you have to invest, as mentioned in the chosen scheme.
- Form
The investor can invest by filling up an application form for the scheme either offline or online or by submitting an investment cheque.
- KYC
To invest in a liquid fund, investors should have completed their KYC formalities with a registered KYC agency. This KYC form is then submitted along with personal documents to the department handling the investment scheme.
If you want to invest in liquid funds or are interested in knowing what is a liquid fund, get in touch with a financial advisory firm like FinEdge. The experts there will help you in understanding what is a liquid fund, how to maximize your returns in the category of liquid investment funds, and how to invest in liquid investment funds.