The word “Liquid” term as per dictionary – a substance that flows freely of constant volume or a fluid that conforms to the shape of its container with retaining its constant volume. In Mutual Fund – Liquid Fund means:  A scheme which generates steady and reasonable income with very low risk and high level of liquidity from a portfolio of debt and money market securities with maturity up to 91 days.

How Liquid Funds Works:

Liquid funds are very ultra short-term debt mutual funds that invest your money in market instruments such as government securities, treasury bills, and call money instruments up to a maturity of 91 days.

Fund Performance of CRISIL Liquid Fund Index as on 14-Mar-2019. (source:icraonline.com)

When you have an extreme short time period to make an investment, it is better to park your money in the liquid fund. You can invest your money for period ranging from 1 to 3 day to 1 to 3 months.

Why Liquid Fund:

In  our daily life liquid CASH is usually deposited in the savings bank or kept in our home locker. Home locker does not generate any return and savings earn little compared to liquid cash plan. When your investment time generally between 1-3 months or less than a year then liquid fund generate good return compared to savings bank.

Uses and some major benefits of Liquid Fund:

• Every day gets counted in liquid funds and therefore, generates return on day to day basis.
• There are no exit or entry load.
• Very low expense ratio (TER)
• Liquid fund investments are less volatile & low risk as they invest in instruments with high credit rating.
• When your time horizon is unknown and short in nature(1-3 Months period), liquid funds provide best possible returns.
• Redemption/withdrawal gets credited to your bank account on next business day (T+1 basis).
• Instant redemption facility- investor can get some credit instantly through web online transaction or mobile app.
• Liquid fund helps to increase habit of investment.
• Bit by bit investments in liquid contributes in long term investment.
• It’s one of the major instrument of treasury management.

Uses of Liquid Fund

• Liquid fund also called as Parking Fund. For example: If you are starting some venture & you do not know when your work will be finished then during this time you can use liquid fund to park your money.
• It is one of the popular option to save money for Emergency fund.
• For accumulating money for purchase of a flat or land, liquid fund are great option which will also generate returns.
• When you have got funds from your head office and it will be spent in 1-3 months, then liquid fund comes handy(for organizational needs).
• You are about to start a new venture, funds collected and going to utilized in 1-3 months this time also liquid fund comes handy.

For retail investors who are keeping money in savings bank account – it is better to use liquid fund. It will add extra mileage in your actual rate of return for unused money. Actually, liquid fund is better alternative to savings bank deposits.

Taxation :

Liquid funds are taxed as per debt mutual fund taxation policy. Information provided below is applicable for the financial year 2018-19, as per the Finance Bill, 2018.

Additional Important Data:

Total deposits in banks increased from Rs. 109 lakh crores at the end of March 2017 to 117 lakh crores in March 2018. More than half of the banks deposits were contributed by individuals, who held the highest share across all populations groups – rural/semi-urbane/urbane/metropolitan, during 2017-18 as per RBI data.

The share of current account (9.70%), saving account (32.10%) and term deposits (58.20%) in March 2018 data revealed by RBI. Further, saving deposits attracted more flows than term and current deposits for the second consecutive year.

The MF Industry Average Assets under Management(AAuM) in 2018( source: AMFI data):

Hybrid(17%) : 3,94,557

Equity(34%) : 7,99,767

Debt including Liquid (49%): 11,49,553

The major contributors of liquid fund are mostly corporate and non-individuals who are taking benefits of these funds. In banking industry (32.10+9.70=41.80%) savings or deposits comes to liquid category where as in Mutual Fund only 25% (source : AMFI data Jan 2019) comes to liquid category, out of which 87% comes from Institutional Investors and only 13% from retail investors.

As of Jan 2019 for *T30 cities, equities accounts for 37% and 63% for other than equity. for *B30 cities, equity accounts for 64% and other than equity share only 36%.

Individual Investor Asset Composition as of Jan 2019

Debt (25.36%) : 331180 crores

Liquid (6.08%): 79404 crores

Equity(67.98%) :887846

ETF & FoFs(0.56%): 7427 crores

Total: 1305857

Retail investors do not invest in liquid funds due to reasons like lack of knowledge or self confidence, due to statutory warning “Mutual Funds are subject to Market Risk” etc. Retail investors either knowingly or unknowingly have ignored safe option of investment i.e. liquid fund of mutual fund. They are still putting their surplus cash in savings bank account. Most of them do not know the liquidity and safety aspect of the mutual fund scheme.

It’s always better to use liquid fund for the purpose of Emergency Fund Or keeping it in the bank account as it will create (2-3)% positive return in addition to OUR regular kitty. Liquid Fund Matters for Retail Investors !

*T30 = Top 30 cities in India, *B30 = Beyond top 30 cities in India