If there is money to be kept aside for a while, instead of a savings account, you can park the cash in mutual fund schemes such as money market or liquid funds. These schemes invest in short term maturity instruments such as money market securities with a low risk profile.
How to invest?
First, one needs to identify the liquid fund and fund house where the investment needs to be made. It makes sense to take advice from a registered investment adviser for the same. One can invest in a liquid fund by filling out a purchase form or through an online platform. Some fund houses prescribe certain higher minimum investment amounts for investments in liquid funds.
The expense ratio charged by the mutual fund house for investment management of the liquid fund is also very low and capped at 1.05%. There is no exit load charged for investment period beyond 6-7 days as the basic aim is to provide high liquidity. Even in case of shorter periods, lesser than a week, the exit load is in the range of 0.006% of the redemption value.
In order to redeem the funds, the investor needs to place a redemption request —either online or by filling out a redemption application. Redemption requests in case of liquid funds are typically processed in a day’s time and the investor can get a credit in their registered bank account subsequently. A few fund houses provide immediate redemption proceeds up to certain percentage of the invested amount for liquid funds.
Points to note
- It is mandatory to have KYC formalities completed for investment in mutual funds.
- If redemption is made within 3 years of investment, it amounts to short term capital gain and is taxed at the marginal rate of taxation applicable to the investor.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)