Liquid Funds – Definition, Features, and Benefits
A certain amount of money is invested in most investments for a fixed period. Breaking such investments implies losing out on returns, and it may take time for the process as well.
Under India's present income tax system, a FOF is regarded as a non-equity fund and taxed accordingly. In other words, while a FOF may be investing in equity-oriented funds (EOFs), the FOF itself is not considered to be an equity-oriented fund, and therefore the tax benefits currently available to an equity fund are not available to a FOF. Consequently, in the event of FOFs investing in national corporate equity securities through EOFs, there is a double tax on Dividend Distribution Tax (DDT), i.e. when national corporations distribute dividends to their shareholders and again when the FOF distributes dividends to their unitholders.
Why invest in Fund of Funds
Liquid funds are mutual funds with a brief period of maturity. This implies that liquid funds have a 91-day or less maturity period. Money invested in liquid mutual funds is invested in tools such as government securities, call money, and treasury bills, which are generally very low risk.
Benefits of Liquid Funds
The merits of investing in Liquid Fund are best suited for people and companies with a surplus quantity of cash, wishing to obtain interest over a short period. They may choose to put it in savings accounts, but they can secure a greater interest rate and also end the fund in case of an emergency.
The main advantages of liquid funds are:
- Greater returns: Liquid mutual funds offer a greater return rate relative to interest rates on savings bank accounts. The greater return rate can produce substantial interest over a brief investment period.
- Lower risk: Liquid funds give less risk than other assets. This is due to the shorter period of maturity. This brief maturity period minimizes your portfolio volatility and thus minimizes the risk of capital. This makes your surplus money the safest investment.
Features of Liquid Funds
Instant Redemption and Shorter Processing: Liquid mutual funds are excellent tools for companies and even individuals to invest in as the fund can be terminated at any time and the maturity period can be as short as one day. Because of its short-term nature, excess idle cash can generate interest and in case of emergencies, investors can opt to withdraw their funds at any moment.
Returns efficiency: The amount invested earns interest from the investment day itself. This removes return leakage and to gain interest, you will not be forced to wait until fixed maturity date.
Liquid mutual funds are great investment choices for companies and people with an accessible surplus. Liquid funds may be terminated before the maturity date and returns will still be earned by the investor as the amount invested starts earning interest from the investment day itself. It is also secure as liquid funds are invested in government securities, call papers and treasury bills.