What are liquid funds?

They are open-ended schemes which invest primarily in debt and money markets with maximum maturity period of 91 days. The maximum maturity time maybe equal to or less than 91 days. Because of it low tenure period, these funds help you avoid risk due to rate volatility. And provide high liquidity to your funds and a stable source of income.

So liquid funds have zero risks?

No, but they are extremely low risk funds which have high liquidity and low interest rate risks.

Because they are very short term term schemes, the risks associated with interest rate fluctuations are very low. Returns on these kinds of funds are also less prone to volatility compared to debt funds.

Are liquid funds similar to other debt funds?

While liquid funds have similar investment strategy as debt funds, the shorter duration of maturity period makes it a more attractive investment option for people who want to park their for shorter amount of time without losing their returns.

What are the benefits of investing in a liquid fund?

Most of the time people think mutual funds are very long term investment options and let their money sit idle in their savings bank accounts, schemes like liquid funds help people earn higher returns and liquidity on their investment for very short period of time.it may also help new investors to know how their money will perform when invested in mutual funds.

How are liquid funds are taxed?

If the funds are held for less than 3 years, the gains from liquid funds are added to investors income and they are taxed at their marginal rate of tax. If the liquid funds are held for more than three years, the long term capital gains tax will be levied.

David Powell
Author

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