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How to Invest in Liquid Funds? Research Team | Posted On Tuesday, September 30,2014, 11:04 AM

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How to Invest in Liquid Funds?



If you noticed …the stock markets were down in the dumps a year ago. Think August 2013. The dollar was rising against the rupee. Bets were being made as to how low the rupee would fall against the dollar. INR 100 for a dollar was the talk in the markets. Stocks were available at dirt cheap prices. The fruit was ripe for the picking. Imagine if you invested in good stocks at dirt cheap prices at this time.

Think February 2014. Again stocks of good Companies were available at cheap prices. Did you increase the number of stocks in your portfolio? Now if you look at the stock markets the prices of most of the good Companies are soaring. You have sold and made a huge profit. So what do you do with this money?

You want to buy more shares with the huge profits you have made but are reluctant to buy shares at prices which you feel are too high right now. You prefer to wait till the market falls. What do you do with these profits? Do you put them in your savings bank account and get 4% rate of return on them per year?

What is Liquidity?

First let us understand the meaning of the term liquidity. Liquidity means easily convertible to cash. You have a savings bank account. You go to your bank give a cheque and provided you have enough money in your account instantly money from the account is in your hands. The savings bank account is said to be very liquid. (Highly liquid).

You are in urgent need of cash. You have a plot of land you want to sell. You have to search for a buyer for the plot. This takes time. The plot of land (real estate) is not very liquid as it cannot be easily converted to cash. (Low liquidity).

See Also: Saving Account vs. Liquid Funds: Which Gives Better Returns

What are Liquid Funds?

These are debt mutual funds which invest in certificates of deposits, treasury bills, and commercial papers called money market instruments which have a very short maturity period under 90 days.The fund manager of the mutual fund invests in these instruments as they have a short maturity period (Under 90 days) and can be easily liquidated (Converted to cash) .So these schemes are called liquid schemes.

Think….You need money in a hurry and redeem (sell your liquid schemes). Within 24 hours the money is your bank account.

Types of Liquid Funds

You can invest in liquid schemes under the growth and dividend option. The dividend liquid schemes give you a dividend on a daily, weekly or monthly basis.

See Also: How to Invest in Liquid Funds?

Why Liquid Funds?

High Liquidity
You can redeem (place a request to sell your liquid scheme) and within 24 hours the money is in your bank account. If you place a request to sell your liquid scheme on any business day ( Monday- Friday) before 2 PM in the afternoon the money is in your bank account before 10 AM on the next day.

No Entry and Exit Loads
There are no charges when you enter a liquid scheme. Most of the liquid mutual funds do not charge you when you exit the scheme.

Return on Investment
These liquid schemes give you around 8% rate of return on the money you invest. If you invest in a savings bank account you would get only 4%. When inflation rises the RBI increases interest rates and liquid schemes give high returns in these times.

Color Coding
The liquid schemes have a color-coding "Blue" which signifies mutual fund schemes of less risk.

See Also: Debt Funds vs. Liquid Funds: Which One Should I Invest?

The liquid fund schemes have very low charges if you invest in them.

If you sell the liquid mutual fund (growth option) before 3 years the profits/gains you get are short term capital gains and these are taxed based on the income tax slab you fall under (marginal rate). If you fall in the highest tax bracket the tax rate is 30.9%. If you sell the liquid mutual fund (dividend option) before 3 years the dividends in your hands are not taxed.

The liquid mutual fund (dividend option) is much better than liquid mutual fund (growth option) as far as tax benefits are concerned. Different tax rates exist for different age groups. For more information on tax rates please check this link.

Benefits of Liquid Funds

Stock markets
If you have made a huge profit in the share market and you don’t want to make any new share purchases till the market falls then you can invest in a liquid scheme where you can get around 8% rate of interest (depending on the interest rates prevalent in the market at that time). When the stock market falls you can redeem (sell) these liquid funds in under 24 hours and invest the money in the stock market.

If you have taken up a life insurance policy and keep forgetting to pay the insurance premium on the time you can invest in a liquid scheme. You have to provide the details of your life insurance policy to the liquid scheme fund house.

You have to maintain sufficient funds in the liquid scheme enough to pay the premiums on the life insurance policy. The liquid scheme automatically transfers the money needed to pay the insurance premium on the due date.

You just need to have sufficient funds in your liquid fund scheme on the day the payment of the insurance premium has to be made. The money invested in the liquid schemes earn around 8% per annum until it is used to pay the insurance premium.

Your short term goals
You can invest money in a liquid scheme for that long-awaited foreign holiday.

So think liquid. Think liquid funds.

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