Mutual funds are offered in different variants so that they can suit the investment preference and risk appetite of different types of customers. In broad terms, mutual funds are mainly of two types – equity funds and debt funds. Equity funds invest primarily in equity and have a high-risk profile. Debt funds, on the other hand, invest primarily in fixed income instruments and have a low-risk profile. The returns offered by these funds are in sync with their risks – the higher the risks, the higher the returns.

Both equity and debt funds are further segregated into different types of schemes. One such scheme, which is quite popular, is a liquid mutual fund. Let’s understand what the scheme is all about and its various aspects –

What is a liquid mutual fund?

A liquid mutual fund is a type of debt mutual fund. It is also called an ultra-short debt fund as it invests in securities that have a maturity period of up to 91 days. Liquid mutual funds are, therefore, highly liquid and can offer good returns on your investments.

Features of liquid mutual funds

 Here are some salient features of liquid mutual funds –

  • The fund invests in fixed income instruments which have a very short maturity period not exceeding 91 days
  • The common assets into which the fund invests include treasury bills, commercial paper, certificate of deposit, repos, Government securities, etc.
  • Returns offered by liquid mutual funds are quite stable. This is because the underlying assets have a very short maturity horizon which minimizes the interest rate risk
  • At least 20% of the portfolio of liquid mutual funds should be help in cash and cash equivalents
  • Some of the best liquid fund in India have very low expense ratios, usually below 1%, which allows them to offer attractive returns on your investment
  • Returns offered by liquid mutual funds can range from 5% to up to 9%. In fact, if you invest in the best liquid fund in India, you can even earn higher returns on your investments
  • You can redeem liquid mutual funds instantly. If you redeem the fund after seven days of investment, there would be no exit load charged
  • Liquid mutual funds offer better returns than your average savings account in a bank. Thus, they are an ideal avenue to park your emergency fund. You can also park your surplus funds in liquid mutual funds for a short time for good returns

Tax implications of liquid mutual funds

Before you invest in the liquid funds, you should understand its tax aspect. So, here are the tax implications of investing in liquid funds online –

 

  • Tax implication on investment into the fund

 

When you invest in a liquid mutual fund, the amount that you invest does not earn any tax benefit. The amount forms a part of your total taxable income and is taxed at your income tax slab rates.

 

  • Tax implication  on redemption of the fund

 

When you redeem the liquid mutual fund, the returns that you earn would be considered as capital gains. The taxation of these gains would depend on the period for which you remained invested in the fund. Here’s how the tax would be charged for both short term and long term capital gains on liquid fund returns –

  • Short term capital gains – if you redeem your liquid mutual fund investment within 36 months of investing into the scheme, the returns earned would be considered short term capital gains. These gains would be taxed at your income tax slab rates
  • Long term capital gains – if you redeem your liquid mutual fund investment after 36 months of investing into the scheme, the returns earned would be considered long term capital gains. These gains would  be taxed @20% after indexation benefit

Investing into liquid mutual funds through ETMONEY.com

To invest into a liquid fund online, you can choose ETMONEY.com. ETMONEY.com is the best investment website which allows you to invest in liquid funds online in simple steps. You can also choose from the best liquid fund in India which offers the highest returns on the website. What makes ETMONEY.com the best investment website is the fact that the entire investment process is paperless and incurs zero additional cost. You can also track the growth of your investment online on the website and redeem the fund whenever you want.

Liquid mutual funds are, therefore, a great investment choice for short term investment needs and can be used for investing your emergency fund. Invest in the best liquid fund online through the ETMONEY.com website and get to experience the advantage of choosing the best investment website for your mutual fund investments.