Liquid Funds are gaining popularity due to it’s safety, returns and tax benefits. However, many of us confused in choosing the right funds. Hence, in this post, let us discuss about the Top 5 Best Liquid Mutual Funds in India in 2018.
What is a liquid fund?
Liquid fund is a type mutual fund that invests money in Bank Certificate of Deposits, Bank Fixed Deposits, Treasury Bills, Bill Rediscounting, Commercial Paper, Collateralised Borrowing & Lending Obligation and other debt securities with maturities up to 91 days.
The NAV of the funds is computed for 365 days, unlike other debt mutual funds where NAV is computed for business days only.
In the case of other debt funds for purchase applications received within the cut-off time (3.00 P.M) having the value up to Rs.2 lakhs, the NAV as at the end of the day of the application is applied. For applications of more than Rs.2 lakhs, within the cut-off time (i.e. 3.00 P.M.) the allotment of units is subject to realization of funds.
However, in the case of liquid funds, for all transactions (irrespective of the value of an investment) received within the cut-off time (i.e. up to 2.00 P.M.) where money is also realized within the cut-off time, the units are allotted as per previous day NAV.
Let us say if a purchase transaction in a liquid fund is submitted on Monday before 2.00 P.M. and amount is also realised by 2.00 P.M. on Monday, then NAV of Sunday is applicable.
Similarly, when redemption request is submitted before cut-off time on Friday, then applicable NAV for redemption is of Sunday, i.e. the day before the next business day. This means, your investments generate returns for every single day of investment.
Who can invest in Liquid Funds?
The popular theory is that park your IDLE money in liquid funds. However, you must understand for how long the money be IDLE. Based on that time horizon you have to take a call. Idle money of one day is different than idle money of 1 year.
Few suggest that we must use liquid funds to keep our emergency fund. But in my view, liquid funds or not so liquid in nature. Because if you request for redemption (before cut-off time), then the money will be credited on the next working day.
Nowadays there is an option of instant redemption. Under this option, you can redeem instantly up to Rs.50,000 per day per folio. This has given some liquidity benefit. However, if your requirement is more than Rs.50,000 then you have to wait for next day.
Few funds offer you the card for withdrawal but there are certain withdrawal restrictions.
Hence, my suggestion is to park your PART of emergency fund in liquid funds rather than parking all 100% into liquid funds.
However, the best idea to utilize liquid funds is to invest for your short-term goals. You can expect a better return than your savings account (4%). Some funds generated around 8% to 9% and some funds around 5%. But we assume liquid funds generate higher than your savings account.
As the liquid funds invest in low maturity papers, the volatility is very less. Also, they invest in high credit rated papers (higher than AA rated), so the default risk is also very minimal.
Hence, you may say the highest safety, more expectation than your savings account are the primary reasons for investing in liquid funds.
What is the tax on liquid funds?
Liquid funds are treated like other debt funds for taxation purpose. If you hold the fund for less than 3 years, then it is considered as Short Term Capital Gain (STCG). However, if you are holding for more than 3 years, then it is considered as Long Term Capital Gain (LTCG).
Short Term Capital Gain Tax for Debt Funds-It will be taxed as per your tax slab.
Long Term Capital Gain Tax For Debt Funds-It will be taxed at 20% with indexation benefit.
I will try to explain the same from below pictures.
Hope you got the clarity about the taxation classification. Now let us understand the rate of tax.
Refer the complete Tax Benefit of Mutual Funds in my earlier post “Budget 2018 – Mutual Fund Taxation FY 2018-19“.
How I shortlisted Top 5 Best Liquid Mutual Funds in India in 2018?
As I said above, all liquid funds invest in debt papers which mature in less than 91 days. However, few funds take the risk by investing in low rated funds for the sake of generating high returns. Hence, I went through each fund portfolio.
Again, the best way I suggest to invest in the liquid fund is in same AMCs funds where you already investing in equity funds or you already have online access or folio number already generated. Because the difference of returns among the funds is very less.
But as I said above, I shortlisted the liquid funds based on the below criteria.
# Expense Ratio
I selected the direct funds for the sake of my comparison and tried to list the expense ratio of all these liquid funds. Because expense ratio also matters when it comes to return on investment.
# Average Maturity
I select the fund which shows category average maturity. All liquid funds invest in the papers which mature within 91 days. Lower the maturity means the fund is holding more cash which in return gives me less return. Hence, I avoid the fund which show lower average maturity.
For example, IIFL Liquid Fund-Direct-Growth average maturity is 0.08. Hence, it indicates that the fund is holding the cash highly. I will not touch such funds.
# Credit Quality
My concentration is to select the funds which are holding 100% AAA rated funds rather than the funds which to a certain extent holding AA rated or unrated papers.
# Modified Duration
Modified duration is again the indication of the volatility of the fund. Hence, I choose the fund which is low in modified duration.
Why returns not matter?
We look at liquid funds mainly for safety than anything else. Also, our expectation from such funds should be always to get more than savings account returns. Hence, I don’t think 1% or less than 1% returns matters to us.
Hence, I overlook the return part and consider only on quality and safety.
Top 5 Best Liquid Mutual Funds in India in 2018
Based on the above assumptions, I have shortlisted Top 5 Best Liquid Mutual Funds in India in 2018. Remember that this is not the FINAL best liquid funds list. Also, as I pointed already, my priority is for highest safety than return. Hence, even though few funds performing well, I may be ignored and you may point that as I am bit BIASED. Two reasons for that may be. One is these funds holding average credit rating as AA or unrated papers and the second thing I may be biased towards fund houses.
Below is the list of Top 5 Best Liquid Mutual Funds in India in 2018 I have selected (marked with green color).
If you find the ratings of these funds in valueresearch, then you find that all these are rated less than 5 or 4 rated. The reason is, the 5 and 4 star rated funds average credit rating is AA or they may be holding some % of AA rated papers, which I completely avoided for selection.
Hope my above methodology and the funds’ selection will help you in short listing the Top 5 Best Liquid Mutual Funds in India in 2018.
Refer my earlier posts related to Mutual Fund Investment in 2018-19
- Types of Debt Funds in India -After SEBI Categorization
- Budget 2018 – Mutual Fund Taxation FY 2018-19
- Top and Best Debt Mutual Funds to invest in 2018
- Top 5 Best ELSS Tax Saving Mutual Funds 2018-2019
- Top 10 Best SIP Mutual Funds to invest in India in 2018
- Is Liquid Fund Safe and alternative to Savings Account?