Liquid Mutual Funds

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

Liquid Mutual Fund

Case Study: Liquid Fund vs. Bank Fixed Deposit

Liquid Fund Bank Fixed Deposit
A Annual Returns 6.7% 6.7% 6.7% 6.7%
B Annual Inflation 5.0% 5.0% 5.0% 5.0%
C Income level 0-2.5L 2.5-5L 5-10L 10L+
D Personal Tax Rate Any 5.2% 20.8% 31.2%
E Invested Amount  10,00,000  10,00,000  10,00,000  10,00,000
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
Assumptions
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 (%)
2014-15 240 9.1%
2015-16 254 5.8%
2016-17 264 3.9%
2017-18 272 3.0%
2018-19 280 2.9%
Average 5.0%

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