What is a Liquid Mutual Fund scheme?

Mutual funds offer a variety of schemes, and as per SEBI, there are five main categories of schemes which are further divided into various sub-categories. 

As of September 2021, in total there are 1,441 schemes including ETFs and Fund of Funds (FOF). Liquid Fund is one of the sub-categories of debt mutual fund schemes. This fund is a short-term debt fund where an investor can invest to fulfill their short-term goals and objectives. This is an open-ended mutual fund scheme investing in debt and money market instruments with a maturity of up to 91 days only. As per the Association of Mutual Funds of India (AMFI), the Asset Under Management (AUM) of the scheme is Rs 3,23,838 crore as of September 2021.  

Who should invest in liquid funds: 

1. Individuals with lower risk appetite: The liquid fund is a low-risk mutual fund scheme as it is a debt fund, it offers preservation of capital and delivers steady returns to their investors. It is ideal for investors with a lower risk appetite. As this is a short-term investment scheme there is no risk of interest rate fluctuations. 

2. Individuals with short investment horizon: This mutual fund scheme is best suitable for individuals who have short-term goals or investment horizons. Generally, these funds are ideal for investors who have an investment horizon of three months, but if they have an investment horizon of longer than three months, then they should consider investing in other schemes to receive optimal benefits. 

3. Individual who wants to park funds temporarily: Individuals who want to park their funds temporarily or currently they don’t need the funds, but require the same funds after a few months. Such individual should invest their funds in this scheme as it is a safe instrument and delivers a steady return. 

Taxation: 

As these are short term debt funds they will be taxed as follows: 

If capital gain arises within 36 months i.e., 3 years then such capital gain is known as Short-term Capital Gain which will be taxed as per the income tax slab rate of the assessee. There is no indexation benefit on short term capital gain, as it is only applicable in the case of long-term capital gain. 

If in case, an investor holds these funds for more than 36 months i.e. 3 years and sells the same, then such capital gain will be known as Long-term Capital Gain which will be taxed at the rate of 20 per cent with the benefit of indexation.