Here’s a complete guide to investing in liquid mutual funds
Emergency fund: First step to financial planning
Most financial planners will recommend building and maintaining an emergency fund as the first step to financial planning. Liquid mutual funds are among the best products to build and maintain an emergency fund. This article will act as a complete guide to understanding the liquid mutual funds meaning & how to invest in them.
Liquid mutual funds meaning
Liquid mutual funds are open-ended schemes that invest in debt and money market securities with a maturity of up to 91 days only. Liquid mutual funds’ meaning is very simple: they are a subcategory under the broad category of debt mutual funds.
As per the liquid mutual funds meaning, they invest in financial securities with low risk and high liquidity. Investors can expect low to moderate returns from liquid funds. Many investors use liquid funds to build and maintain their emergency funds or park surplus funds for a short period. So, the top priority for these investors is liquidity and the safety of capital.
Some liquid funds provide the instant redemption option to provide liquidity to investors. Using this feature, an investor can redeem the units, and the fund house will instantly transfer money to their bank account through IMPS. But, there are limitations on the amount (usually 90% of the units’ value of Rs. 50,000, whichever is lower) that an investor can redeem through this option.
How to invest in liquid funds?
An individual can invest in a liquid fund during the New Fund Offering (NFO) or any time after that. Usually, the minimum investment during NFO is Rs. 5,000. An individual can also start a systematic investment plan (SIP). Some fund houses provide SIP mode with an amount as low as Rs. 100.
Once the investment is made, the fund house credits the equivalent number of units to the investor’s mutual fund folio account. The scheme’s net asset value (NAV) changes as per the changes in the scheme’s securities portfolio value. An investor’s profit or loss will depend on the changes in the scheme NAV.
Factors to consider while investing in a liquid fund
After understanding the liquid mutual funds meaning, you should consider the following factors while investing in a liquid fund:
The risk involved
The risk involved in liquid funds is relatively lower than many other debt funds and equity funds. The fund manager chooses to invest in securities with one of the best credit ratings. Liquid funds are suited for investors with a conservative risk profile.
The liquidity in liquid funds is better than other debt funds and equity funds. As discussed earlier, some liquid funds provide the instant liquidity option. You can redeem your units using this option, and the money is credited to your bank account instantly through IMPS.
The returns from liquid funds are low to moderate. As liquid funds invest in low-risk securities with high liquidity, the returns are low to moderate.
Please check the expense ratio of the liquid mutual fund scheme that you are investing in. The expense ratio reduces your returns. Hence, the lower the expense ratio, the better.
Liquid mutual funds are taxed like other debt mutual funds. If you redeem your liquid mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
If you redeem your liquid mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.
Now you understand liquid mutual funds meaning and factors to consider while investing. Now, let us understand how to invest in a liquid fund.
How to invest in a liquid mutual fund scheme through Glide Invest?
You can invest in a liquid mutual fund scheme through the Glide Invest app. While investing through the Glide Invest App, you will have to take the following steps:
- Specify your financial goal, for example, building an emergency fund, or you can select a liquid fund of your choice for investment.
- Specify the amount you wish to accumulate for the financial goal or the amount that you wish to accumulate in the liquid fund
- Select the number of years in which you have to achieve the financial goal or the number of years that you wish to invest in the liquid fund
- Select the amount by which you will increase your SIP every year
If you have selected a particular financial goal, the platform will recommend three investment portfolios based on the above inputs: aggressive, conservative, and balanced. Once you select an investment portfolio, you will see a combination of equity, debt, and hybrid funds recommended for investment. The platform will recommend liquid funds as part of a debt portfolio based on asset allocation. Make sure you understand the liquid mutual funds meaning correctly before investing.
If you have selected a specific liquid fund, the app will proceed ahead with investing in the selected fund.