ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Where Does a Fund Manager Invest My Money If I Opt for Liquid Funds?

Updated on May 2, 2016

Know All About Liquid Funds

Mutual Fund Investments

The asset size of India’s mutual fund (MF) industry has grown 14 per cent to Rs.13.53 lakh crore in FY16, from Rs.11.88 lakh crore in FY15, says an article published in Business Standard in April 2016. MF investments are considered to be an effective tool for achieving short-term and long-term financial goals. Although they tend to be riskier than savings accounts or bank fixed deposits, they offer higher returns.

There are various types of MFs: debt, equity and hybrid. Each type has been further classified, depending upon the investment style, securities they park their corpus in and the maturity period. A liquid fund is a debt scheme that provides the investor an opportunity to earn returns while parking his money in debt and money market securities. This is a good option if you have surplus cash lying idle in your savings account for a time horizon of three to six months.

What are Liquid Schemes?

A liquid fund or a liquid income scheme is one that focuses on the prevention of capital erosion, and invests money in safer instruments like certificate of deposits, commercial papers, treasury bills and non-convertible debentures, says an article by Birla Sun Life Mutual Funds. As the name suggests, a liquid fund tends to have high liquidity.

To ensure liquidity and to avoid market volatility, these schemes invest in securities that have residual maturity of 91 days or less. Such investments offer interest-based returns. They basically have three tyes of plans under them: growth plan, dividend payouts and dividend reinvestment. The dividend payouts are made daily, weekly or monthly. Growth plans do not have dividend payouts and any increment is reflected in the higher unit value.

Benefits

They have a zero lock-in perid or a lock-in period of a maximum of 3 days. Withdrawals are processed as soon as you make a requuest. However, the entire procedure may take 24 hours. Short-term maturity of the assets make these investments liquid. Being highly liquid in nature, they tend to have no or minimal exit load. Also, these are one of the safest debt market investments as they mostly invest in fixed income securities.

Returns

The returns offered by most of these funds are generally higher than those provided by a savings account or short-term fixed deposits. It is especially a good investment option during high inflationary pressure. In such a situation, the RBI keeps the interest rate high to tighten liquidity. High interest rates translate to high returns. The best liquid schemes have returned as high as 7.5 to 8 percent on an average during 2015, daily, on an annualised basis, according to an article published in Livemint in February 2016. Investing in such schemes can help you organize a contingency fund that you access in times of emergency.

How to Invest

Choosing the right time horizon and the right type of scheme is essential to maximize your returns. The type of scheme you choose also determines the tax implications that it might have. Ones that have dividend payouts are subject to dividend distribution tax (DDT) before paying the dividend to investors. The DDT under any debt scheme is close to 28.84 percent (25 percent+10 percent surcharge+3 percent cess). Dividend payout or re-investment works more efficiently if you fall under the 30 percent tax bracket, according to an article published in Moneycontrol in January 2014.

On the other hand, capital gains under the growth option that have been sold within 12 months are taxed according to the investor’s tax slab. This is better is you fall under the 10 or 20 percent tax bracket. Before investing, you must analyze the returns offered by a liquid fund in comparison to both the benchmark index as well as other schemes in the peer group.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)