How to Invest in Liquid Mutual Funds – Online and Offline

This extensive guide covers the fundamentals, step-by-step instructions, and key considerations for a successful investment journey.
How to Invest in Liquid Mutual Funds
3 min
01 March 2024

Investing your hard-earned money wisely is crucial for financial stability. Liquid mutual funds offer a safe and convenient option for short-term investments. Whether you are a seasoned investor or new to the financial world, understanding how to invest in liquid mutual funds is essential.

What are liquid funds?

Liquid funds are a type of mutual fund that mainly put money into short-term money market instruments with maturities of up to 91 days. These funds are known for being low-risk because they invest in highly liquid instruments like treasury bills, certificates of deposit, and commercial papers, among others. Compared to other mutual funds, the instruments in liquid funds tend to be less volatile. They aim to provide easy access to cash and preserve capital over short periods, making them attractive to investors with extra funds they want to park temporarily.

These funds are regulated by the Securities and Exchange Board of India (SEBI) to ensure they invest in highly liquid and high-quality securities. Moreover, they must maintain limits on exposure to each issuing entity and follow strict investment guidelines.

How do Liquid Funds Work?

  • Liquid Mutual Funds are a type of debt funds which mainly invest in short-term money market instruments with maturities of up to 91 days.
  • They aim to offer investors a safe and easily accessible investment option.
  • When you invest in a Liquid Mutual Fund, your money joins a pool with other investors, managed by a fund manager.
  • These investments provide stable returns and high liquidity, making them ideal for storing extra funds, emergency funds, or short-term financial goals.
  • Investors have the flexibility to redeem their units at any time.

How to Invest in Liquid Fund: Online and Offline mode

1. Offline Mode: Investors can invest in liquid funds by filling out application forms and submitting them physically at any Official Point of Acceptance or POA for the mutual fund house or, the Registrar & Transfer Agent or R&TA.

2. Online Mode: Online investing has revolutionized mutual fund investments, allowing investors to buy liquid mutual funds with a simple click. There are two primary ways to invest online:

  • Invest through platform provided by the fund house: Asset Management Companies or AMCs offer online platforms for investors to buy, sell, and manage their investments. However, these platforms may lack comprehensive features and investment advice.
  • Invest through platform provided by your broker: Many brokers like the Bajaj Finserv platform provide online platforms that offer access to multiple AMCs and additional services such as investment advice, portfolio management, and consolidated reports.

Thing to keep in mind before investing in Liquid Mutual Funds

Before investing in liquid funds, consider the following factors:

1. Cut-off timing: When investing in liquid mutual funds, it is important to stick to the cut-off timing. This timing determines which day's Net Asset Value (NAV) will apply to your purchase or redemption.

  • For investing in liquid mutual funds, the cut-off time is 1:30 pm. Investing before this time means you'll be eligible for historic NAV (T-1 day). Also, for historic NAV the funds need to be credited to mutual fund scheme account prior to the cut off. Investing after 1:30 pm means you'll get the next business day's NAV.
  • For redemption, the cut-off time is 3:00 pm. Redeeming before this time gets you the same day's NAV, while redeeming after means you'll get the next business day's NAV.

2. Taxation: Taxation for liquid funds follows debt taxation rules. If you redeem your investment before holding it for 36 months, you'll pay short-term capital gains tax based on your tax slab. However, if you redeem after holding it for 36 months, you'll pay a long-term capital gains tax of 20% with indexation applied. Dividends received from liquid funds are also taxable for individual taxpayers according to their applicable tax slabs.

3. Exit loads: Liquid funds may have exit loads for investments redeemed within a specified period, usually seven days.

Benefits of Liquid Funds

  1. Potential for better returns: Liquid funds offer competitive returns compared to traditional savings accounts.
  2. No exit load for an investment of seven days or more: Investors can access their funds without incurring additional charges after seven days.
  3. Liquidity: Investors can redeem their investments quickly, making liquid funds ideal for short-term financial needs.
  4. Low risk: Liquid funds invest in high-quality, short-term instruments, reducing the risk of capital loss.

In conclusion, investing in liquid mutual funds online provides individuals with a convenient and secure way to grow their wealth while preserving capital. By understanding the basics of liquid funds and following simple investment strategies, anyone can take advantage of this accessible investment opportunity.

Frequently asked questions

How long should I stay invested in Liquid Mutual Funds?

Liquid funds are suitable for short-term investments, typically ranging from a few days to a few months.

Where do Liquid Mutual Funds invest?

Liquid funds primarily invest in short-term highly liquid debt instruments like treasury bills, certificates of deposit, and commercial papers, among others

Who should invest in Liquid Funds?

Liquid funds are suitable for investors seeking low-risk investment options with short investment horizons.

How much return can you expect from Liquid Funds?

Returns from liquid funds vary based on market conditions but generally offer competitive returns compared to traditional savings accounts.

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