What Are These Liquid Funds:

The basic objective of Liquid fund is to manage the surplus money of investors by investing in short term duration instruments like short term deposits,commercial papers and other short term instruments offered by banks,corporates or Non-banking finance companies.

Some of the important features of liquid funds :

• Liquid funds are better substitutes to bank saving account to keep surplus money.History shows better yields provided by liquid funds than saving bank account.
• Liquid fuds invests money in the instruments to be matured 91 days.Most of the times investment is in AAA rating securities.
• Liquid funds do not carry any entry or exit loads.Investots can keep their money for a single day and withdraw.
• One can switch partial money from liquid fund to equity fund of same mutual fund at any time.Also one can start Systematic Transfer Plan(STP) similar to SIP from bank account.
• Everyone like individuals,corporates,partnership firms,FIIs,NRIs[Check it for USA and Canada] can invest in liquid funds.
• Unlike other fund schemes,there is cut off time of 12.00 noon for liquid funds.
• Redemption is within T+1 days unlike to T+3 days to other mutual fund schemes.
• Mutual fund houses like Reliance mutual fund provides a facility of ATM card for investors,so money can withdrawn from HDFC/VISA ATMs without any charge as well,though max limit is as per ATM rules or 50% of the total available fund.
• There is no history of negative returns for day to day basis by liquid funds.Hopefully,History will repeat again in future also.

Tax Treatment for Liquid Funds:

1. For growth option,in case of short term capital gains i.e.profit realised due to holding of units for a period of less than 1 yr,income is added to taxable income of the investor.In case of long term capital gains,investors are taxed with a rate of 10% without indexation and 20% with indexation,,which one is lower.
2. In case of dividend plan,dividend received is Tax free in the hands of investors.Investor need not to show this as income,but funds need to pay a dividend distribution Tax of 25% as per current rates.