What are Liquid Funds?

Liquid funds are a type of mutual fund that primarily invests in highly liquid, low-risk debt instruments such as treasury bills, commercial papers, and certificates of deposit. These funds are designed to provide investors with a high degree of liquidity and safety while generating moderate returns.

Liquid funds are ideal for investors who want to park their surplus funds for a short period, typically a few days to a few weeks, and earn returns that are higher than what they would earn by keeping their money in a savings account or a fixed deposit. Since the underlying assets of liquid funds have a short maturity period, they are less risky compared to other types of debt funds.

One of the main advantages of liquid funds is their high degree of liquidity. Investors can redeem their units at any time, and the redemption proceeds are credited to their bank account within 24 hours. This makes liquid funds ideal for meeting short-term financial needs such as emergency expenses or payment of bills.

Liquid funds are also tax-efficient as they are treated as debt funds for tax purposes, and gains made on investments held for more than three years are taxed at a lower rate compared to gains made on investments held for less than three years.

However, it's important to note that while liquid funds are relatively safe and provide higher returns than savings accounts or fixed deposits, they are not completely risk-free. The returns on liquid funds may vary depending on the performance of the underlying debt instruments, and there is a possibility of credit risk if the issuer of the debt instrument defaults. It's always recommended to seek professional advice from a financial advisor before making any investment decisions.