Liquid Funds : What, Why, How, etc.

What are Liquid Funds ? What are the advantages of investing in a liquid fund ? How to invest in liquid funds in India ? How to find their latest NAV's and historic performance ?

The word "liquid" or "liquidity" is usually associated with availability of free cash. Thus liquidity of an investment measures the ability of that investment to be quickly converted to cash. For example an investment in short term bank deposit is a liquid investment as compared to investment in a mutual fund having a lock-in period of 3 years or an investment in real estate.

What are liquid funds ?
Liquid Funds are one of the best available options you have to park your liquid cash and earn 'tax-free' dividends on it. You can simply think of liquid funds as an alternative investment options to short term fixed deposits. Liquid funds invest with minimal risk and their portfolio usually consists of short term deposits, short term government securities, Money Market Instruments, and I have also once seen a small exposure to leasing and real estate. From an external point of view, liquid funds function just like mutual funds - when you invest money you buy 'units' of the fund, they also have NAV , come in growth and dividend options.

Liquid Funds and Dividend Options:
For liquid funds with dividend options, the dividend is either Monthly dividend (MD) or Weekly dividend (WD) or even Daily dividend (DD) !. Yearly dividend would not be a popular in something that you expect to be 'liquid' like a short term deposit, would it?

Are Dividends on Liquid Funds Taxable ? (Liquid funds versus fixed deposits)
The dividends paid out by Liquid funds "in the hands of the investor" are currently tax free (in India), just like dividends paid out by Mutual Funds. However the Liquid Fund itself has to pay Dividend distribution tax and a surcharge of 3%. Currently the Dividend Distribution Tax (DDT) levied on Liquid Funds is 25%. Thus, DDT+surcharge comes out to be around 25.75%. This is however still less than 30% tax one would have to pay on interest from savings account (assuming the taxable income enters the 30% bracket). Moreover, including the 3% education cess, if 10% surcharge becomes applicable (i.e. when the taxable income of that person is greater than 10 lacs) then the total tax one would pay on interest in savings account or fixed deposit would be over 33% as compared to 25.75% for Liquid Funds. Thus there is a clear cut tax advantage for choosing Liquid Funds over short term fixed deposits.

How to invest in liquid funds in India ?
As I have already mentioned, the external functioning of the Liquid fund is very much like a mutual fund. Find a suitable liquid fund and invest in it as you would invest in a mutual fund. If you are located in India, you will probably need a PAN card to invest in a liquid funds.

Where can you find a list of liquid funds in India ?
Let me give few names / examples of Liquid Funds in India to really convince you of their existence :) These are not necessarily well chosen or well performing funds. Just random examples. In fact at the time of writing this blog entry, some of them have also given negative returns in the past few months. Later I may research and upload a list of funds which I personally find preferable.
For a comprehensive list of Liquid funds in India, choose one of the following options.
  • Click here to get a list of liquid funds list of Moneycontrol.com.
  • Go to finance.rediff.com , Search "Liquid Fund" and get a long list.
Liquid Funds, finding NAV and past / historical performance :
This again you can get on the finance.rediff.com or Moneycontrol.com or maybe even dozens of other financial websites, sometimes including the website of the fund itself. When you get a list of liquid funds in the above mentioned manner, just click on each to get details of NAV, historic NAV etc.

Exchange traded Liquid Funds - Liquid BeEs :
Liquid BeEs (or LIQUIDBEES) is a liquid fund which can be traded on NSE. This is currently the only ETF which is a Liquid Fund. The NAV, or the Price of Liquid BeEs is currently around Rs. 1000.

Other types of low risk Funds :
Arbitrage Funds, like Liquid Funds are also provide low risk investment options. However, in case of a good liquid fund one can normally expect returns comparable or better than the short term fixed desposit interest rate. In case of Arbitrage funds there is no such 'base-line' expectation. Moreover, now SEBI is planning to allow direct system or algorithmic trading. This will increase the efficiency of arbitrage funds, but will also be easy for people to set up more arbitrage funds.

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Sep 1, 2008

1 comments:

AMPHA June 25, 2009 at 4:03 PM  

Nice and concise article. But please put a date on the article. You have written about some future actions e.g. SEBI allowing algorithmic trading etc. With a date, it will be be helpful to know when the article was published to ascertain whether or not the "future" events are still to occur!

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