SEBI (Securities and Exchange Board of India) categorize mutual funds further to give investors a better picture of the different mutual fund products. This helps them to make better decisions. There are several features based on which the mutual funds are categorized- risk profile, asset allocation, investment strategy, etc.
Debt is an important category of mutual fund. Liquid mutual funds meaning is very simple: liquid funds are debt funds that invest in fixed-income securities.
Why invest in liquid mutual funds?
If you are in doubt whether to invest in liquid mutual funds or not, here are some reasons to invest in liquid mutual funds.
Professionally managed funds
Generally, established and reputed funds houses or AMCs own liquid mutual funds. They have experienced fund managers whose job is to manage a fund. They sketch strategies in alignment with the scheme’s aim and implement them to buy or sell securities. Thus, the funds are managed in a very professional manner. Thus, it is easy for everyone to seek capital appreciation even with minimum knowledge of liquid mutual funds meaning.
Liquidity in investment portfolio-low risk
The meaning of liquid funds is to provide liquidity to your investment portfolio. Thus, these funds do not bind a person to a fixed tenure. You can always access your funds. They provide the flexibility to investors to back out conveniently. For most liquid funds, there is no exit load if your investment period is just over a week. You get to decide how you want to invest, grow and earn payouts. You can choose to receive your payout weekly or monthly according to your needs. It also allows you to shift your holdings to an equity fund if you need it. The interest rates or the investment returns do not show fluctuations as the investment tenure is very short. Thus, the investors remain assured of gains. Thus, from liquid mutual funds meaning, we understand low risks is their USP. Credit card risks are also less in this case because of the brief maturity period. If a person carefully assesses fundamentals such as credit, percentage, sector, quality of management, their risks are considerably lowered.
Diversity in mutual fund portfolio
Some equity schemes have a fixed lock-in period. Thus, such mutual funds cannot be redeemed if an investor wants to make the most profit out of them. In such a case, you can add a liquid mutual fund to your portfolio. In case of emergencies, you can withdraw your liquid funds unit. Liquid funds give you diversity.
Multiple ways to invest in mutual funds
You can invest in mutual funds in 2 ways- by payment of a lump sum amount or by starting a liquid fund SIP. By making a lump sum payment, investors collect more mutual fund units in quantum with the investment principal, on the basis of the fund’s NAV. SIP(Systematic Investment Plan) is an easy method to invest in liquid funds. You can invest small amounts periodically as long as you want.
Earnings and taxation
An investor can earn in two ways from liquid funds-
- Capital Gains- Fund’s units are redeemed at a price higher than the buying price. If you hold your liquid funds for less than 3 years, they are liable to STCG tax. If the funds are held for more than 3 years, they are liable to LTCG tax at 20% post indexation.
- Dividends- Tax is applied on dividends based on one’s applicable personal tax rate. For dividends over Rs. 5000, 10% TDS has been applied.
Thus, liquid mutual funds meaning implies high liquidity, flexibility, low risks, and good capital appreciation. If you want to invest your funds with low risks, then liquid mutual funds can be ideal for you.