When it comes to parking surplus cash for short durations, Liquid Funds have emerged as one of the most preferred investment options. These funds are a category of debt mutual funds that invest primarily in short-term money market instruments like treasury bills, commercial papers, and certificates of deposit. The key advantage? High liquidity and relatively low risk compared to other market-linked instruments.
Unlike traditional savings accounts, liquid funds offer better returns while maintaining easy access to your money. Most liquid funds allow redemption within 24 hours, making them ideal for emergency funds or short-term goals. Additionally, they are less volatile than equity funds, as they are not directly exposed to stock market fluctuations.
How Do Liquid Funds Compare to Private Equity Funds?
While liquid funds focus on short-term debt instruments, private equity funds operate at the other end of the spectrum. Private equity involves investing in privately held companies, often with a long-term horizon and higher risk appetite. These funds aim for significant capital appreciation but require investors to lock in their money for years, unlike liquid funds that prioritize quick accessibility.
For investors, the choice between liquid funds and private equity funds depends on financial goals and risk tolerance. If you need a safe, short-term parking space for your money, liquid funds are the way to go. On the other hand, if you’re looking for long-term wealth creation and can withstand illiquidity, private equity might be worth considering.
Taxation and Returns
Liquid funds are taxed based on capital gains. For investments held up to three years, short-term capital gains tax applies as per your income slab. Returns typically range between 4–6%, which is higher than most savings accounts but lower than equity-based instruments.
Liquid funds offer a perfect blend of safety, liquidity, and better returns than traditional savings options. They are not meant for aggressive growth but serve as an efficient tool for managing short-term cash needs. For long-term wealth creation, private equity funds may complement your portfolio, but for quick access and stability, liquid funds remain unmatched.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.