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Decoding investments in ‘new’ liquid mutual funds

Liquid funds can invest in debt and money market securities with maturity of upto 91 days only.

, ET Online|
Jul 12, 2019, 09.52 AM IST
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Liquid funds are a category of debt mutual funds which invest in very short-term market instruments like treasury bills, government securities and call money. According to Sebi's definition, liquid funds can invest in debt and money market securities with maturity of upto 91 days only.

After Sebi’s latest guidelines for liquid funds, these schemes are supposed to become safer than before. Liquid funds can now invest maximum 20 per cent of their assets in one sector. These schemes are considered a good option for retail investors who are looking for minimum risk and higher than savings bank account returns.

After the change in norms, the valuation of all investments will now be entirely on mark-to-market basis. This means all securities in the portfolio will be valued at prevailing market price. Financial planners believe that there might be a dip in returns because of reduction in risk taken by these schemes.

According to the new guidelines, an exit load will be levied on investors of liquid mutual fund schemes who get out of such investments within seven days. “The exit load in liquid funds can be a deterrent for many investors who look for liquidity in these schemes, “says Pankaj Gera, a certified financial planner based in Delhi.

Liquid funds, as the name suggests have easy liquidity. Investors can get their money back one day after submitting a redemption request. Mutual fund advisors recommend liquid funds for very short term money parking or short term goals. Investors who want to park their money for one day to six months can look at liquid funds. Liquid funds are also used extensively for staggering a lumpsum amount in equity through systematic transfer plan. This helps investors tide over volatility in the equity markets.

“Liquid funds carry the lowest risk and volatility among mutual funds. Their portfolio consists of instruments with high credit rating. However, if you have a longer horizon than six to seven months, you should look at ultra short duration funds. And investors should know that liquid funds are not free of risk. They are low risk funds but there is a risk of default. We have seen it in IL&FS fiasco,” says Pankaj Gera.

Just like other debt mutual funds, liquid funds held for more than three years are eligible for long term capital gains tax with indexation. If sold before three years, you have to pay tax as per your tax slab. The fund will be subject to a dividend distribution tax of 29.12% if you opt for the dividend option.

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