Saving money for an emergency through liquid funds
Have you ever thought of getting reasonable returns without compromising too much on how quickly we could get our hands on the cash? Financial planners recommend that investors must build an emergency fund, typically 3-6 months of their expenses.
For such a purpose, the investment vehicles that you need to look for are the ones that provide capital safety and easy liquidity. The categories of funds that satisfy these criteria are liquid funds.
Liquid funds are an open-ended debt mutual fund schemes which invest the corpus into short term money market instruments like short term corporate papers, treasury bills and certificates of deposit with short maturity period (residual maturity not exceeding 91 days). The schemes are available in variants like daily, weekly or monthly dividend and growth option.
Liquid Funds are treated like other debt funds for taxation purpose. If you hold the fund for less than 3 years, then it is considered as Short Term Capital Gain (STCG). However, if you are holding for more than 3 years, then it is considered as Long Term Capital Gain (LTCG).
The tax treatment differs with the growth and dividend plans that you opt for. Dividends received under liquid plans are not taxed at the hands of investors but fund houses pay dividend distribution tax @29.12% (including surcharge and cess).
Effective October 20, all liquid funds have started charging an exit load varying between 0.0070% to 0.0045% of the redemption amount if the money is withdrawn within seven days of investment.
Liquid funds extend the advantage of risk adjusted returns along with basic principles of accessibility and safety while maintaining a healthy contingency fund. Hence, it may be considered wise to park your surplus funds into liquid mutual funds and start an SIP to build a contingency fund.
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