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Before we talk about liquid funds, it’s important to note that traditional investment options like bank fixed deposits or savings accounts have been generating less than stellar returns for the past 5 years.
As a result, Indian investors are turning to other investments like mutual funds for wealth creation. The consensus is that mutual funds can be a great instrument for long term wealth creation.
However, there is a short term mutual fund option called a liquid fund that can be both better than traditional bank savings account or FD and is safer than other mutual funds.
In this blog, we’ll explore liquid funds and look at the 10 best liquid funds for 2022. These are the top liquid funds currently being recommended by Cube’s mutual fund advisor, Wealth First.
A liquid fund is a type of debt fund that invests in short term securities like Corporate Bonds, Treasury Bills, Commercial Paper, Debentures, and more.
Liquid funds are considered to be one of the safest mutual funds because of the short maturity period (91 days). Maturity period in this case simply means the time it takes for the liquid fund to get its money back from the bonds or securities it has invested in.
Not only that, the fund manager invests your money in the best possible debt instruments.
These are the 10 best liquid funds currently being recommended by our advisor, Wealth First.
Broadly speaking, liquid funds are known to give investors 5 top benefits that are centred around liquidity, risk, and returns. Let's take a look at each of the best liquid mutual fund benefits in greater detail.
Liquid funds are easy to withdraw. In fact, that's why they're called "liquid" funds meaning and funds that have high liquidity.
This simply means that your investment will be credited to your bank account in 24-48 hours.
To start with, liquids funds generally do not charge a fee for premature withdrawal or exit load after 7 days. Furthermore, the best liquid funds in India are known to have a low expense ratio between the range of 0.20 to 1%.
An expense ratio is nothing but the fee charged by the management team of a liquid fund to manage the securities in its portfolio.
All of these factors imply that the investment cost of a liquid fund is relatively lower than other mutual funds like equity funds.
Liquid funds have a maturity period of 91 days that is the time it takes for the liquid fund to get its principal back from the securities that it has invested in.
This relatively short maturity period is known to reduce the risk of investing in the best liquid mutual funds.
Liquid funds have been historically known to generate returns of 4-8% along with high liquidity. This is, as you can tell, better than the returns that you'll get on an average bank FD. Furthermore, the exit load in liquid funds is not as harsh as it is on FDs.
You can invest in the best liquid mutual funds in India for as low as ₹100. The low minimum investment amount can be useful for amateur investors who want to understand how investing in mutual funds in India works.
Any Indian with an Indian bank account can invest in liquid funds after KYC formalities. But whether or not you should invest in liquid funds must be based on your goals, age, risk appetite, etc.
Generally, investors prefer to invest in liquid funds for the short term. The main objective of a liquid fund is to preserve capital and deliver high liquidity.
This makes liquid funds a great place to park surplus money for short term needs or emergencies. Investors prefer to invest in liquid funds for other reasons as well.
The dividends that you receive from a liquid fund are non-taxable. A liquid fund also offers indexation benefits. In addition, withdrawing money from a liquid fund is easy.
Withdrawals are processed within 24 hours. Some liquid funds also offer the ‘Insta redemption’ facility. If you're using Cube, you can transfer money from your liquid funds to your bank account within minutes with Cube ATM.
Speak to a wealth coach today to know if you should invest in liquid funds.
You must understand your investment goals to know if liquid funds can add value in the short or long run. For example, if you’re an aggressive investor looking for high returns, liquid funds are not the right option.
Your investment goals areand directly intertwined with your portfolio. Liquid funds may be suitable based on the financial health and gaps in your portfolio.
There are two ways to know if liquid funds can add value to your portfolio:
Liquid funds are widely considered to be safer than other mutual funds like equity funds and arbitrage funds. However, liquid funds still carry interest rate risk.
Cube Wealth’s risk quiz can help you do this - it’s a simple quiz with a handful of important questions. After completing the risk quiz, you will:
Download the Cube Wealth app to take the risk quiz and invest in the best liquid funds of 2022
In general, debt funds are known to have a low expense ratio. This holds true for liquid funds too since they are debt funds. A low expense ratio generally means that you’ll have to pay less when you redeem your investment.
However, certain liquid funds charge an exit load for redemptions before 7 days.
A liquid fund has the potential to generate better returns than your bank account or even an FD. But you must look to the future because past performance won’t matter much when you think of long term wealth creation.
Wealth First helps you invest in liquid funds for the future based on a complex analysis of 12+ qualitative and quantitative factors. Download the Cube Wealth app to know more.
Consulting a wealth coach is the best way to know which liquid fund is right for you. However, these are some factors that you can consider to evaluate and choose the right liquid funds:
A good fund manager with a stellar track record can help the liquid fund generate better returns (subject to market conditions). Thus, knowing the fund manager’s investing habits can help you evaluate a liquid fund.
Liquid funds have been known to generate stable returns due to their low portfolio maturity period. However, seeking quality advice from experts like Wealth First can help you understand if the fund will continue to generate consistent returns in the future.
A bigger expense ratio will eat into your profits. Thus, you must evaluate the expense ratio before investing in a liquid fund.
Bigger may not necessarily be better when it comes to fund size but it’s a useful metric to look at when evaluating any mutual fund including liquid funds.
Investors will have to pay a Short Term Capital Gains tax if liquid funds are held for less than 3 years. The tax rate is according to the investor’s tax slab.
Furthermore, investors will have to pay a Long Term Capital Gains tax if liquid funds are held for more than 3 years. The tax rate is 20% with indexation benefits.
Download the Cube Wealth app or Speak to a wealth coach to invest in the best liquid funds for 2022.
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
Ans. Yes, liquid funds are better than FDs because they offer:
Download the Cube Wealth app to invest in the best liquid funds.
Ans. In general, liquid funds are considered to be the safest mutual funds. You can invest in liquid funds in a safe way using a reliable and transparent app like Cube Wealth.
Ans. Liquid funds are safer than other mutual funds and better than FDs. Thus, liquid funds may be a good option based on your investment objectives.
Ans. Liquid funds are not tax free and are taxed just like Debt funds:
You’ll be liable to pay taxes on gains made on liquid funds sold before 3 years. The gains are added to your annual income and taxed according to your I-T slab.
You’ll have to pay taxes on gains made on liquid funds sold after 3 years. The LTCG tax rate is 20% with indexation benefits.
Liquid fund dividends are taxed at 29.12%.
Ans. Liquid funds can be used when you need to park surplus money for a short period of time since the returns are better than a bank savings account.
But that’s not all, investors prefer liquid funds as a temporary pitstop in an STP. The STP amount is parked in the liquid fund and is transferred to the equity fund on the due date.
Liquid funds can also be used for the long term since historical data suggests that these funds can generate 5-7% returns over 5+ years. Download the Cube Wealth app to invest in the best liquid funds.
Liquid funds play a crucial role in the Indian financial landscape, offering investors a safe and highly liquid avenue to park surplus funds. The top ten liquid funds in India for 2022, as highlighted in this guide, provide an array of choices for individuals and businesses seeking capital preservation and easy access to their funds. However, it's essential to remember that the primary objective of liquid funds is to ensure safety and liquidity rather than generating high returns. As you select the right liquid fund, consider your short-term financial goals, the fund's historical performance, and expense ratios. Due diligence and ongoing monitoring of your investments can help you make the most of these essential tools in managing your finances.
*Note: Facts & figures are as of 03-01-2022. While we update our blogs regularly, download the Cube Wealth app for the latest information on liquid funds.
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