How to invest in liquid mutual funds

What are these?
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What are these?

According to Sebi, a liquid fund is a mutual fund scheme that invests in money market securities with a short maturity period of 91 days or less. These are a safe and secure place to either park surplus funds or set aside an emergency fund. They are lower in terms of risk due to this short maturity period. Investors looking to park their money for one day to six months can look at liquid funds.

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Amount of investment
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Amount of investment

An investment in a liquid fund can be made with a minimum application amount as indicated in the scheme information.

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Application form
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Application form

The investor can make a fresh investment either by filling up an application form and issuing an investment cheque or making an online application using the mutual fund website portal or any other mutual fund transaction platform.

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Do you need your KYC done?
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Do you need your KYC done?

To be able to invest in a liquid fund, the investor should have KYC formalities completed with a KYC registration agency. A KYC form needs to be filled up and documents (address and identity proof) should be submitted, with originals for this purpose.

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​What are the cut-off timings?
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​What are the cut-off timings?

Applications and payment received (funds available for utilisation) before 2 pm on a business day are eligible for NAV of the previous day. If the application is submitted and payment is received (funds available for utilisation) after 2 pm, the NAV of the same day is applicable.

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Liquidity criteria
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Liquidity criteria

As the name suggests, these funds have easy liquidity. In addition to normal modes of redemption available to mutual fund schemes, some liquid funds also allow any time redemption facility up to certain amounts.

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​What kind of taxation are they subject to?
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​What kind of taxation are they subject to?

Liquid funds are subject to taxation applicable to debt funds. If the liquid fund investment is held for more than three years, it is subject to long term capital gains which is taxable at 20% with indexation. If the investment is held for three years or less than that, the capital gain is taxed at the marginal (highest) tax slab rate applicable to the assessee.

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Points to note
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Points to note

1. Once done, KYC is valid across all mutual funds, one doesn't need to repeat it for each investment.
2. Since the investment is made in short term debt and money market instruments, the risk profile of liquid funds is low.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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