Mutual fund – an organized pool that collects money from many investors and invests it in a variety of assets e.g., equities, debt, organize under the management of a mutual fund manager who makes all investment decisions.
How a Mutual Fund Works
- Pool of investors money contributed by many individuals e.g., 100people.
- Fund manager decides where to allocate the pooled money equity, debt, or both based on the fund’s objective.
Income sources:
- Interest from debt instruments
- Dividends from equities
- Capital gains difference between purchase and sellingprice.
- Expense Ratio – fee the fund charges for management (typically 1%-3% of the total assets).
Types of Mutual Funds SEBI-Approved
The following table:
| Type | Primary Investment | Risk Level | Typical Goal |
|---|---|---|---|
| Equity Fund | Stocks equity | Low-Medium | Capital appreciation High |
| Debt Fund | Fixed-income securities bonds, debentures | Medium | Stable income |
| Hybrid Fund | Mix of equity & debt | Varies by sub-type | Balanced growth & income |
| Solution-Oriented Fund | Specific goal (e.g., child education, marriage) | Varies | Goal-based savings |
| Other e.g., Index Fund | Replicates a market index e.g., Nifty, Sensex | usually low | Passive market-linked returns |
Liquid Funds – A Subtype of Debt Funds
Definition
Liquid fund – a debt-type mutual fund that invests in securities with a residual maturity ≤ 91 days and has no lock-in period, allowing quick redemption.
Who Should Use Liquid Funds?
- Cash-surplus individuals who have short-term, uncertain investment horizons e.g., freelancers, business owners.
- People who need easy access to funds within a few days to months.
- Investors who want higher returns than a savings account without locking money for long periods.
Expected Returns
The following table:
| Scheme example | Typical Return | Comparison |
|---|---|---|
| ICICI Prudential Liquid Fund | ≈7% annually | > Savings-account≈ 4 and often > Fixed Deposit 6 |
| Other major liquid fund schemes | 6-8% typical | Same trend |
Returns are not guaranteed; they fluctuate with market conditions.
Liquidity & Redemption
- Redemption timeline: same-day or within 1-2 days after request, provided the maturity is ≤ 91 days.
- No lock-in you can withdraw the exact amount .Any day without penalty.
Checklist Before Investing in Any Mutual Fund
The following table:
| Item | Why It Matters |
|---|---|
| Expense Ratio | Lower ratios keep more of your returns. |
| Fund’s Objective | Aligns with your financial goal growth, income, or speci fic purpose. |
| Liquidity Needs | Choose liquid funds for short-term, high-liquidity needs. |
| Historical Returns | Compare past performance with alternatives savings, FD. |
| Risk Profile | Match the fund’s risk level with your tolerance. |
| Fund House Reputation | Trustworthy managers reduce operational risk. |
Bonus Tip – Choosing the Right Fund
- Assess your time horizon – short < 3 months liquid fund.
- Check the expense ratio – aim for ≤ 1% if possible.
- Match returns to risk – higher returns usually entail higher risk; liquid funds offer Low risk with moderate returns.
These notes provide a concise yet comprehensive overview of mutual funds, especially liquid funds, to help you make informed investment decisions.
Liquidity & Returns
Liquid fund – a type of debt mutual fund that invests in short-term, high-liquidity instruments such as certificates of deposit CDs, commercial papers CPs, government bonds, and Treasury bills.
- Liquidity: Units can be redeemed instantly, and the money is usually available immediately after a sale.
- Returns: Typically higher than a regular savings account but lower than many other mutual fund categories.
Taxation of Liquid Funds
Short-term capital gain STCG: Gains from selling units within 3 years of purchase.
- Taxation follows the investor’s income tax slab.
The following table:
| Income | Tax Rate on STCG |
|---|---|
| ≤2.5L | 0% no tax |
| 2.5L-5L | 5% |
| 5L-10L | 20% |
| >10L | 30% |
Long-term capital gain LTCG: Gains from holding beyond 3 years.
- Flat tax rate of 20% (subject to indexation).
Precautions Before Investing
- Entry load: Zero for most liquid funds.
- Exit load: Generally zero; some funds charge if units are redeemed within 7 days.
- Lock-in period: None for standard liquid funds; always verify.
Checklist
- Check for entry/exit loads (especially any 7-day exit load).
- Confirm no lock-in period.
- Review portfolio diversification see next section.
Risk Profile & Underlying Instruments
- Risk-return trade-off: Higher returns relative to savings accounts imply some risk.
- No stock market risk because the fund invests in debt instruments.
- Typical holdings:
- Certificates of Deposit CDs
- Commercial Papers CPs-e.g., ILFS’s CP exposure caused a risk event when the issuer defaulted.
- Government bonds & Treasury bills
Risk Example: Commercial Paper
Unsecured debt – if the issuing company defaults (e.g., ILFS), the fund’s value can suffer.
- Mitigation: Ensure the fund’s portfolio is diversified across multiple issuers and instrument types.
Portfolio & Diversification
- Diversify across:
- Multiple debt instruments CDs, CPs, Gov-bonds, T-bills.
- Various issuers to avoid concentration risk.
Where to view holdings:
- Money Control.com – free site where each liquid fund’s portfolio is listed.
Portfolio Review Table
The following table:
| Fund Name | % in CDs | % in CPs | % in Gov Bonds | % in T-Bills | Top 3 Issuers |
|---|---|---|---|---|---|
| Example A | 45% | 30% | 15% | 10% | ABC Corp, XYZ Ltd, Govt. |
| Example B | 30% | 40% | 20% | 10% | DEF Ltd, Govt., MNO Ltd |
Replace with actual data from MoneyControl.
Investing via Easy Plan App
- Set a Savings Goal e.g., emergency fund, vacation.
- Enter monthly expenses.
- Choose horizon e.g., 3-month emergency fund.
- Select contribution frequency weekly, monthly.
- Choose savings rate e.g., 10.
Estimated completion: ~23 months for a 3-month emergency fund.
Bonus: 20 reward for setting the first goal.
Flexible Investment Features
- Minimum multiple: ₹ 100 can vary each month.
- No penalty for skipping a contribution.
- Goal tracking with automatic updates.
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