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.
No comments:
Post a Comment