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Are liquid funds a good choice to park your emergency corpus?

The ongoing covid-19 crisis has further highlighted the importance of having an adequate emergency corpus. With so much uncertainty about what could happen in future, you may be wondering if you should hold a portion of your emergency corpus in liquid funds or move the entire sum into safer options such as bank savings accounts, especially because liquid funds have seen greater volatility in net asset values (NAVs) recently, owing to liquidity-led disruptions in the debt markets.


What is a liquid fund?


Debt mutual funds are currently classified based on the maturity of their investments. Liquid funds invest in instruments that have a maturity date of 91 days or less like treasury bills, Government securities, call and notice money. Currently, liquid funds are providing a return higher than traditional savings bank accounts. The redemption procedure in a liquid fund is also very simple. Once the redemption request is submitted, the funds get credited to the investor’s account in one working day.


What is the investment tenure for liquid funds?


Financial planners recommend investing in these funds for periods up to sixmonths. These funds work very well to save for short term goals since they are not susceptible to capital loss. This makes them perfect for goals like school fees or holiday expenses. Liquid funds are also excellent for investment in equity funds using the Systematic Transfer Plan (STP), where a fixed amount gets transferred from the liquid fund to an equity fund, giving return on both types of funds.


What are the risks involved in liquid funds?


AS With every investment, there is a slight element of risk involved. HOwever, liquid funds carry the lowest element of risk among other mutual funds. These funds generally invest in instruments with high credit rating. When it comes to the fund NAV, you can also get the NAV data on the weekends.


What are the tax implications on liquid funds?


If you stay invested in a liquid fund for more than three years, you will be able to claim the benefit of indexation on your capital gains. If you liquidate before 36 months or 3 years, the gains are added to your tax slab and taxed at regular slab rates. When you choose the dividend option, the fund is subject to dividend distribution tax of 29.12%. This means the dividends are tax free in your hands.


Source: Times of India

Have you been knowing wrong about Liquid Fund ?

Have you been knowing wrong about Liquid Fund ?

Liquid Funds are debt mutual funds that invest in debt securities with very short maturities. The residual maturities if bonds held by liquid funds cannot exceed 90 days, as per the rules defined by the regulator. In fact, most liquid mutual funds hold securities that are due to mature in the next 30 days or so.

Bonds maturing within two months need not be ‘marked to market’ – only their interest component needs to be factored in while calculating NAV’s (net asset values). Hence, the NAVs of Liquid Funds remain relatively steady compared to other debt funds.

Why are Liquid Funds used in STP’s (Systematic Transfer Plans)?

Their low volatility, steady returns, and zero exit costs make liquid funds an ideal choice as a deployment vehicle for STP’s (Systematic Transfer Plans) into equity funds. 

Instead of investing a lump sum into an equity mutual fund, you could choose to park your money into a liquid fund and initiate an STP into an equity fund from it.

Over time, your liquid fund balance would be transferred to the equity fund. In this way, you’ll be protected from the risk of investing your entire money at an interim market peak.

You’ll benefit from corrections as you’ll be making a staggered entry into the equity fund. At the same time, your idle balance will earn better returns than your savings bank account.

How are Liquid Fund Returns Taxed?

Profits earned on your liquid fund units (at the time of redeeming or switching them) are taxed per your income tax bracket if the units are redeemed within three years – a highly likely scenario, given that liquid funds are meant for short term investments).

In the unlikely scenario that you hold on to your liquid fund units for more than 3 years, the profits will be indexed for inflation and taxed at a flat rate of 20%.

Do Liquid Funds Provide Guaranteed Returns?

Contrary to popular belief, Liquid Funds do not provide guaranteed returns. However, they do provide relatively steady returns compared to all other classes of Mutual Funds, owing to the nature of their portfolios.

Liquid funds typically provide returns that are similar to ‘call money’ rates, meaning that they can be expected to provide annualized returns in the range of 5% to 6% in the immediately foreseeable future.

Are Liquid Funds Risk-Free?

Liquid funds are very low risk, but not risk-free. There’s a chance that bonds held by liquid funds can default if the companies that issue them are in severe financial distress.

Owing to the very short maturities of the bonds held by liquid funds, his remains a remote possibility – but the risk still exists on paper. 

When a bond held by liquid fund defaults and is subsequently downgraded to a “D” rating by any leading rating agency, the fund needs to write off its value entirely.

This results in a hit on the fund’s NAV. A case in point was the relatively recent Taurus Mutual Fund fiasco, wherein the fund had to write off close to 10% of its holdings in BILT after the latter defaulted and was downgraded.

So, liquid funds are very low risk, but not risk-free. It’s best to stick with liquid funds of large and renowned AMC’s, which employ more robust research teams.

How Liquid is Liquid Fund?

As their name would suggest, liquid funds are highly liquid in nature. If you place your request for redemption before 3 pm today, you’ll get your money in your account the next morning.

However, SEBI has recently mandated that AMC’s should allow instant redemptions of up to Rs. 50,000 from Liquid Funds.

Many AMC’s have already implemented this. Your Financial Advisor can help you clarify which funds currently offer this facility, and which ones do not.

Emergency Funds – Why have it, How to Build & where to Invest.

An emergency fund is an essential corpus that you must keep aside to tackle emergencies. 

It is a fund that you can fall back on at the hour of crisis or for unexpected and unplanned scenarios in Business as well as your Personal life.

1. How to Build an Emergency Fund? An emergency fund cannot be built overnight but is done gradually. 

Set aside a particular amount every month. Soon it will grow into a considerable corpus that you wish to have.

2. How much should your Emergency Fund have? Depending on your income and expenses, an emergency fund can be three to six months of your monthly expenses.

3. Where to Invest in an Emergency Fund? The emergency fund should be parked monthly to a Liquid Fund with no exit load. Don’t forget to put a small portion in a bank account that is available 24/7.

The economic crisis is a vivid example of why an emergency fund can be so important. If you don’t yet have an emergency fund, now is the time to prioritize it.