How and Why to Invest in Liquid Funds

What do you do when you have surplus funds? You may have to invest them elsewhere or might need the money after a while, but the point is that you have surplus cash on hands. Letting it lie at home or in the savings account will hardly give you any returns. 

Why not make money from excess funds, that too, without taking a lot of risks? Sounds good! This is how the concept of liquid funds has become popular. They are short-term investments made in debt and money markets. 

Features of a Liquid Fund

  • A liquid fund is a low-risk instrument that gives more returns than the saving account.
  • Investors have the right to make an investment and withdraw the money at any time.
  • It takes just 24 hours to process the withdrawal request and credit the money in your account.
  • NAV is calculated round the year, every day. The units are allotted the previous day’s NAV if you apply before 2 PM.
  • The NAV of liquid funds doesn’t fluctuate as much as it does for other funds. 
  • The investment duration ranges between three months and six months. Some funds have a maturity period of 91 days or even less. 
  • The application process is simple and fuss-free. There are no complexities involved anywhere in dealing with a liquid fund investment. 
  • There is no penalty to pay if you exit the market before the maturity period. While tax applies to the actual amount, the dividends are tax-free. 

How to Invest in a Liquid Fund 

  • Decide the amount you want to invest. Even though withdrawing money is easy, it is better not to invest everything you have into one scheme. 
  • Choose the fund and the financial institution you want to invest in. Pick a firm with AAA rating for best security. 
  • The average maturity period is 91 days and most preferred by investors. Lesser duration will not give the same returns. 
  • Choose the fund objective and portfolio allocation. For example, there are options like daily dividends, growth plans, weekly dividends, and monthly dividends. Make sure to choose the one that matches your risk tolerance. 
  • Fill and submit the form. You can do this through an advisor or directly through the website of the mutual fund in India companies. 
  • The next step is to complete the KYC (Know Your Customer) formalities. Fill the form and submit the required ID and address proof. You might be asked to attach originals for reference. 
  • Check the time to submit your application. You can decide based on NAV. For the previous day’s NAV, apply before 2 PM. 
  • If you already own mutual fund investments, you don’t have to complete the KYC formalities again. 

Remember that a liquid fund is best suited for short-term investments. Extending it for a longer duration is not only risky but also attracts tax. Any liquid fund investment held for more than 3 years is treated as long-term capital gains.