What are liquid mutual funds?
Liquid mutual funds are a category of debt funds which invests in money market securities with a very brief maturity – typically up to 91 days. These money market securities would include treasury bills, commercial papers, certificate of deposits, term deposits and similar cash equivalent securities.
Why should one invest in liquid mutual funds?
Currently, none of the liquid mutual funds have an exit load and redemptions placed before 2 p.m. is credited to the investor’s bank account the very next day. This makes liquid mutual funds “liquid” in its truest sense.
Also, typically, liquid mutual funds hold at least 95% of its portfolio in AAA-rated or sovereign quality instruments. This allows for a very low exposure to credit risk.
Invest in Liquid Mutual Funds to get better returns
Who should invest in liquid mutual funds?
Liquid mutual funds are ideal for investors seeking to park their money for a brief period or who wish to invest in the lowest-risk category. Liquid mutual funds are a superior alternative to savings bank account – while it offers similar liquidity, the category’s average 1-year return is ~7% as against the 3.5% interest offered by popular savings bank accounts.
In fact, in the current scenario, it even makes sense against a bank FD on a post-tax basis. At the end of three years, one can generate almost 6% more on their investment. This is majorly because of the indexation benefit on taxation allowed in liquid mutual funds and the fact that unlike bank FDs, gains/interest is not charged on an accrual basis but on a realised gain basis. For those interested, the calculation is given at the bottom of this post.
What is the tax implication on liquid mutual funds?
Liquid mutual funds are debt funds and taxed in accordance. For gains redeemed within three years of investing, the gains are taxable per the investor’s personal tax bracket. If the investor redeems after three years of investing, the gains are taxed at 20% with indexation (think of indexation as an inflation adjustment)
What is indexation?
Here’s a brief example of how indexation works (this is a crude illustration to spare you the technical jargon and intricate concepts)
Let’s assume the following:
- Price of 1 kg apple today: INR 100
- Annual inflation: 10%; hence, price of 1 kg apple next year INR 110 (100 price + 10% inflation)
- Annual return on your investment: 15%
- Tax rate: 20% with indexation
Let’s say your investment of INR 100 has grown to INR 115 (at 15% annual returns) in a year. You would be required to pay tax on the gains of INR 15 (INR 115 – INR 100).
However, during this period, the cost of 1 kg apple went up from INR 100 to INR 110 per kg due to inflation – this means that to maintain the same consumption, your INR 100 last year is equal to INR 110 this year.
Indexation benefit as a concept suggests that you pay tax only on the real gains beyond inflation – so instead of paying tax on INR 15 (115 current value – 100 investment), you pay tax on INR 5 (115 current value – 100 investment – 10 cost rise due to inflation)
Available Liquid mutual funds:
|Fund Name||MyWay Wealth Rating|
|Tata Liquid fund||
|Reliance Liquid fund|
|Kotak Liquid fund|
|ICICI Prudential Liquid fund|
|Aditya Birla Sun Life Liquid fund|
|Invesco India Liquid fund|
|HDFC Liquid fund|
|IDFC Cash Fund|
|L&T Liquid fund|
|SBI Liquid fund|
|Axis Liquid Retail Fund|
|LIC MF Liquid fund||Unrated|
|HSBC Cash Fund||Unrated|
|Franklin India Liquid fund||Unrated|
|DHFL Pramerica Insta Cash Fund||Unrated|
|Sundaram Money Fund||Unrated|
|Edelweiss Liquid Retail Fund||Unrated|
|Baroda Liquid fund||Unrated|
|Indiabulls Liquid fund||Unrated|
|IDBI Liquid fund||Unrated|
|JM Liquid fund||Unrated|
|Mirae Asset Cash Management Fund||Unrated|
|BNP Paribas Liquid fund||Unrated|
|Mahindra Liquid fund||Unrated|
|Canara Robeco Liquid fund||Unrated|
|Union Liquid fund||Unrated|
|Essel Liquid fund||Unrated|
|BOI AXA Liquid fund||Unrated|
|Principal Cash Management Fund||Unrated|
|IIFL Liquid fund||Unrated|
|Quant Liquid fund||Unrated|
|Taurus Liquid fund||Unrated|
|UTI Liquid Cash Fund||Unrated|
|Parag Parikh Liquid fund||Unrated|
How to invest in a liquid fund?
1. Log in on your MyWay app
Case Study: Liquid Fund vs. Bank Fixed Deposit
|Liquid Fund||Bank Fixed Deposit|
|D||Personal Tax Rate||Any||5.2%||20.8%||31.2%|
|As on End of Year 1|
|F||Current Value [(E+A)]||10,67,000||10,67,000||10,67,000||10,67,000|
|G||Tax on Accrual [(F-E)*D]||–||3,484||13,936||20,904|
|H||Value C/F [(F-G)]||10,67,000||10,63,516||10,53,064||10,46,096|
|As on End of Year 2|
|I||Current Value [(H+A)]||11,38,489||11,34,772||11,23,619||11,16,184|
|J||Tax on Accrual [(I-H)*D]||–||3,705||14,675||21,868|
|K||Value C/F [(I-J)]||11,38,489||11,31,066||11,08,944||10,94,317|
|As on End of Year 3|
|L||Current Value [(K+A)]||12,14,768||12,06,848||11,83,243||11,67,636|
|M||Tax on Accrual [(L-K)*D]||–||3,941||15,454||22,876|
|N||Indexed Cost [E*((1+B)^3)]||11,57,625|
|O||Real Gains [(L-N)]||57,143|
|P||Tax Payable on Redemption [For Liquid: (O*20%)]||11,429||3,941||15,454||22,876|
|Q||Value Redeemable [(L-P)]||12,03,339||12,02,907||11,67,789||11,44,760|
|R||Avoidable Loss [Liquid Fund Returns – Bank FD Returns]||432||35,550||58,579|
|A||SBI 1 year fixed deposit rate w.e.f. 30.07.2018||6.70%|
|A||Liquid Fund 1 year category average||6.70%|
|B||Historical CII||FY||CII||Increment (%)|