Liquid funds are named so due to the liquidity they offer to the investors, as the transactions towards the redemption of liquid funds are processed faster than other mutual fund schemes. Redemption requests from liquid fund units are processed on a T+1 basis. The redemption value is credited to the linked bank account on the following working day of the investment transaction.

Investments in liquid funds do not carry any exit load if the investor has held the units for seven days or more. However, if the investor needs to redeem investments before seven days, the transaction will be subject to exit load, which reduces as the holding period increases.

Liquid Fund Performance

Liquid funds provide market-linked returns to investors, wherein the investments are made in debt securities regularly at prevailing market interest rates. There is a minimal credit risk for investment in liquid funds, as the investments are predominantly in sovereign securities and money market instruments.

Further, since the maximum maturity of investments in liquid funds can be 91 days only, the changes in market interest rates may not significantly impact the portfolio valuations.

How to Invest in Liquid Funds in India?

Investing in liquid funds is the same as other mutual fund schemes. Investors can invest in liquid funds by physically submitting the application forms at any Official Point of Acceptance (POA) for the mutual fund house or the Registrar & Transfer Agent (R&TA). Investors can also undertake investment transactions digitally, i.e., through the website/ mobile apps of the mutual fund house or R&TA.

Liquid Mutual Funds Taxation

The appreciation in the investment value of liquid fund units is taxed during the redemption of mutual fund units. If the units have been held for less than 36 months, Short-Term Capital Gains (STCG) from liquid funds are taxable at the tax rates as applicable to the taxpayer.

However, if the holding period of liquid fund units has been 36 months or more, such Long-Term Capital Gains (LTCG) are taxed at 20% after the indexation benefit. Indexation benefit increases the investment cost for the inflation prevailing over the period while calculating the taxable gains, thus taxing only the actual returns.

Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date.

How to invest in overnight and Liquid Funds?

The process of investing in overnight fund and liquid fund is the same as that for investing in any other mutual fund scheme. One can invest in these funds through our website/ mobile application or physically submitting the application form at Official Points of Acceptance (POA).

What are the Benefits of investing in Liquid funds?

The benefits of investing in liquid fund schemes are many, including

• Potential of better returns as compared to other traditional investments

• No exit load for holding beyond 7 days

• Easy liquidity of funds

• Low risk investment option

• The convenience of investing through SIP or in lump sum

How are liquid funds and overnight funds taxed?

The taxation of liquid funds and overnight funds is summarised as below:

Further, if an investor receives a dividend of more than Rs. 5,000 in a year from the mutual fund, TDS @ 10% of such dividend income is also deducted by the mutual fund.

Should I invest a lump sum or SIP in liquid funds?

One can make investments in mutual funds, including liquid funds, through two modes – lump sum or Systematic Investment Plan (SIP). While lump sum investment represents a one-time investment, SIP implies periodical investments made automatically in the specified mutual fund scheme. Liquid funds find their utility as a practical solution for parking of surplus funds and emergency funds. As such, investors may consider investing in liquid funds in lump sum as and when such surplus funds arise.

What is a liquid mutual fund?

Liquid mutual funds are debt funds that invest in securities such as treasury bills, commercial paper and certificate of deposit with a maturity upto 91 days.

Are liquid funds safe?

Liquid funds investments are considered as a safer option when compared to other investments as they have a maturity of 91 days and hence do not experience a lot of volatility. Due to this, liquid fund returns are often stable and consistent.

Disclaimers:

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.