HOW LIQUID MUTUAL FUNDS OPERATE?

HOW LIQUID MUTUAL FUNDS OPERATE?

From UTI MF

Liquid mutual funds are a special category of debt funds which are used to park money that the investor may need within a short period of time, usually up to three (3) months.

Under SEBI rules, liquid funds can invest in debt instruments with a residual maturity of up to 91 days.

These funds park their money in instruments which include commercial papers, treasury bills, call money, certificates of deposit and other such very short term instruments.

Although liquid funds are allowed to hold fixed income instruments of up to 91 days maturity, most fund managers invest in papers with maturities less than what is stipulated.

This gives liquid funds the advantage of extremely low volatility even when the debt market shows substantial price fluctuations. In turn the portfolio profile of liquid funds make these schemes a very low-risk investment product.

In terms of cost structure, most liquid funds charge their investors not more than 0.10% (10 basis points). These funds also enjoy tax benefits like all other debt funds.

Although these funds are for parking money for short term, an investor keeping money in a liquid fund for more than three years to meet emergency needs could be charged at most 3% effective income tax rate.

This is because the investor will enjoy indexation benefit if he remains invested for three years or more.

Unlike in fixed deposits in some of the banks, an investor is allowed to partially withdraw money invested in a liquid fund.

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