Liquid Funds: Know the Benefits of Investing in Liquid Funds

In the turbulent market scenario of today, investment in liquid funds offers a very viable investment instrument. Liquid funds are basically the debt instruments that form the basic investment channels for liquid securities, commercial papers, treasury bills etc. The liquid fund instruments are short term securities and as such, have a limited incubation or maturity period, as compared to various other investment options. Liquid funds usually come with a maturity period of as low as 91 days and form one of the safest and surest options for parking of funds. 

When it comes to the trading domain and the way traders function, it must be kept in mind that liquidity as a cash instrument works in a cyclic manner – liquid funds invested at the beginning of the operating cycle get released at the end of the cycle to fund fresh investments. However, additional liquid funds may be required by the firm or the individual trader whenever the need arises to buy additional assets to increase the trading platform or to diversify the trading portfolio. As such, the demand for liquid funds is affected by several factors, some of which are random and totally dependent on the market projections. 

Investment in liquid funds must be understood as a function of the volume of operating cycles under which earnest benefits are accrued. Under this approach, the working capital is determined by the duration of the operating cycle and the costs involved. The duration of the operating cycle is the number of days involved in various stages of investment. The key to managing liquid funds is in optimizing the benefits and costs associated with holding liquid cash. The whole objective of such a management is best achieved by speeding up the working capital cycle, particularly the collection process and investing surplus cash in short term asset allocation in most profitable avenues.  

Benefits: Generally, the benefits of investing in liquid funds may be summed up as follows:

  • Liquid funds are overall short-term instruments that come with a maturity period of 91 days. Such a short maturity term allows the investor to safely park the funds by mitigating the risks involved and lowers the fluctuation in rates. This generally increases the overall liquidity of the investment portfolio and also generates a stable income over a period of time.
  • Liquid funds are categorized as low-risk ventures because of various factors. One of these factors is the fact that due to the low maturity term period, the risks associated with interest fluctuations are also low. Moreover, the rate of credit risk is also low which means that the probability of default is very less.
  • By rotation of the liquid fund investment in the market, the chances of accruing large benefits are also high. The overall earnest benefits are much more than traditional instruments like savings etc. The options for future investment due to access to a larger capital market are diverse and the overall flexibility of investments is high. The frequency of dividend pay-out is high and the trade deal in liquid funds can be executed whenever the market scenario seems favorable.
  • During inflation and general market price upturns, liquid funds are the safest channels for returns on investment. High-interest rate is maintained and as a result, the accumulated benefits are high in volume, even during times when general trading is undergoing inflation.
  • Since liquid funds do not have any lock-in period, the deal entry and exit timings are very flexible. What this means is that the investor can withdraw from the deal as and when the pricing factor and the general parameters seem to be going well.
  • In the case of liquid funds, the overall capital gains that the investor accumulates are added to the income corpus and are thus taxed marginally, if the investor holds these funds for a period of less than three years. Once the holding period crosses this time period of three years, the investor will have to pay tax as per the current LTCG (Long Term Capital Gains) taxation slabs, evenly at 20%. This, in essence, means that the tax benefits that arise from an investment in liquid funds are higher as compared to traditional savings instruments.

How to invest?

Investment in a liquid fund can be made after completion of the KYC process with a registered KYC firm. The process of KYC involves the submission of identity and address proofs by the investor, which are then verified in detail. The details submitted must be accurate and backed up with documentary evidence, as required. 

A fresh application form for investing should be duly filled up and submitted along with the minimum application amount, as is mentioned. Instead of physical submission of cheque/documents, the whole application can be submitted online as well, through the portal of a registered mutual fund firm. The credentials of the firm must be duly checked before applying for the investment. 

As far as the cut-off timings is concerned, the applications submitted before 2 PM of any given day are valued at the previous day’s Net Asset Valuation. Any application received after 2 PM is then valued at the same day’s NAV.  

There are some other factors that affect the determination of the need for investment capital vis-s-vis the volume of liquid funds that have been invested. A high net profit margin contributes to the volume of this investment capital. The inflow of the net profits from liquid funds can be understood by adjusting various parameters that constitute the portion of funds that is diverted towards other investment channels and the net profit that is then accumulated in the corpus, after due taxation. Therefore, the decision to invest in a liquid fund must be taken after proper checking of the specific needs and requirements that you have.     

With Tradebulls, you get to choose from the best available options for your liquid fund investment channels. The available channels are numerous with pointed specific benefits so that you can take an informed decision. For further details and to invest today, click on the mentioned link: