What Are Liquid Funds And Which Are The Top Performing HDFC Liquid Mutual Fund Schemes in The Market?

What Are Liquid Funds And Which Are The Top Performing HDFC Liquid Mutual Fund Schemes in The Market?

Feb 17, 2018

There is no mutual fund scheme that doesn’t have an investment objective. Investment objectives point out what a particular scheme or plan tries to achieve. Like every mutual fund scheme, even liquid funds have an objective. And this objective is to offer investors the chance to make profits from investments in money market securities such as commercial papers, treasury bills, certificates of deposit etc, with no compromise on the aspect of liquidity.

To make sure the risk factor is tolerable and there is a higher degree of liquidity, liquid funds make investments in securities with residual maturity of 91 days or less. As per the codes, SEBI has specified, liquid funds have been assigned the blue color code, because of their less risky nature.

The majority of such funds don’t have an exit load. The prime reason behind this is – they are often redeemed at a short notice. And even if there is an exit load, it’s generally low for redemption made within a week or so.

Although they are a low-risk investment instrument which doesn’t cause capital loss, one should invest in them carefully. If you are an investor, make sure you invest in them for the right term so as not to be a victim of opportunity loss.

What kind of opportunity loss? Well, if you have invested in a liquid fund for a long term of say a year or more, you might end up compromising on your chances of receiving massive returns through FMPs, short-term income funds, and other similar options.

Liquid funds are generally profitable, and they may be considered more profitable looking at the kind of returns other popular or traditional options such as short-term fixed deposits and savings bank accounts offer. Still, it’s advisable that an investor chooses the right liquid fund option to make an investment in order to receive maximized profits.

The fact that these funds are available in so many versions such as growth, dividend payout, and dividend re-investment, categorized according to their nature, makes it imperative for an investor to take a well-thought-on investment decision. This is important because liquid funds need to pay dividend distribution tax before distributing dividends to investors. Why? Simply because liquid funds are debt funds in essence! Usually, liquid funds offer growth and dividend reinvestment opportunities. A few schemes, however, offer dividend payout options too. But this applies in case of large investments only.

According to present income tax laws, the DDT levied on debt funds such as liquid funds is 28.3250 percent ( 25 %+ 10% surcharge+3% less), for individual investors. But for investors who go for growth funds, short-term capital gains are taxed according to their application taxation rate (short-term investments, in this case, refer to investments that get sold within a year).

According to this taxation method, an individual under the 10% tax slab will be required to pay a tax at 10 percent. Hence, it will be beneficial for him to invest in a growth option instead of a dividend reinvestment or a dividend payout option.

On the other hand, for individuals under the 30% tax slab, dividend reinvestment happens to be the best bet.

Another reason why liquid funds are a better alternative for investors is that mutual funds including liquid funds refrain from deducting tax at source. Hence, it happens to be an amazing investment option for people who have opted for a growth scheme. Also, because it’s the fund that pays this tax, the dividend earned by investors remains tax-free!

There are lots of liquid funds that an investor can choose from. However, if you look at them from the angle of performance, you won’t find a lot of difference among the schemes available.

If you still would like to examine the performance of a liquid fund, you could do that efficiently by comparing its performance with the market average or a set benchmark. When it comes to comparing the performance of a benchmark, the standard considered is the one offered by Crisil’s liquid fund index. Nevertheless, it is just a benchmark, and you may have your own criteria to judge the efficacy of a liquid fund.

Below, you find two of the top performing liquid fund schemes available today, and their performances over the years. If you are considering an investment in some liquid fund scheme sometime soon, then it would be valuable for you to know what these two funds are like -

1. HDFC Liquid Fund - PREMIUM - Growth – This scheme was launched on February 24, 2003.The prime objective of this open-ended growth fund is to boost income in sync with a high liquidity level, through a well-planned portfolio having a combination of debt and money market instruments. If you want to invest in this fund, you will have to start with a minimum sum of INR 10000000.

Now, let’s look at the scheme performance table below. In the first year of its inception, the scheme offered a return percentage of 6.72 against the market average of 6.05. So, it may be inferred that the scheme showed a good performance in the first year itself. In the third year of its advent, the scheme gave a 7.79% return against 7.14% offered by other comparable schemes in the market. Looking at the fifth year of the fund’s inception, we see that the plan outperformed the market average by 0.82%. The performance of the scheme was good in the tenth year as well when it recorded an 8.02% return, as opposed to a return of 7.1% offered by other similar schemes. Now, if we look at the overall picture, we see that the scheme has never let down its investors. It has always outperformed other comparable schemes taken together, which has enabled it to offer a since-launch return percentage of 7.33 against 6.79% given by other liquid funds.

Source: Swaraj Wealth Research

Now, look at the bar diagram below. It indicates the kind of performance the scheme showed from 2012 to 2016. Interestingly, during this stretch, there hasn’t been a single year when the returns offered by the scheme were lower than the market average. Hence, if you are thinking of investing in liquid funds, there can’t be a better option than this to make an investment in.

Source: Swaraj Wealth Research

2. HDFC Liquid Fund - GROWTH - This liquid fund was launched on the 17th of October in the year 2000. It is an open-ended growth fund that aims at increasing income while keeping the level of liquidity high. The investments are mostly made in debt and money market instruments. If you want to be a part of this scheme, you may have to start with a minimum investment amount of INR 5000.

Now, let’s have a look at the scheme’s performance since the time of its inception through its scheme performance data. In the first year of the scheme’s advent, it offered a return of 6.61% to its investors. Since the market average in that year was 6.05%, it may be inferred that the scheme performed better than its counterparts that year. In the third, the scheme again outstripped its rivals by offering a return percentage of 7.71. The market lagged behind with its returns at 7.14%. The story remains the same even in the fifth year of the scheme’s performance when its return for that year was pegged at 8.28% against 7.54% offered by other comparable funds. In the tenth year of the scheme’s performance, the scheme led other schemes by providing a return of 7.89%. This brings us to the total since-launch return offered by the scheme which is 7.3%, as opposed to 6.79% by other funds. The story this scheme narrates is too of success and growth. Hence, this scheme too is perfect for you to make an investment in.

Source: Swaraj Wealth Research

Even the yearly performance bar graph shows a similar growth pattern for this scheme. Every year from 2012 to 2016, the scheme offered higher returns than the market averages. Good news? Well yes, if you are an ambitious investor!

Source: Swaraj Wealth Research

Despite the fact that liquid funds are more profitable than traditional options of investments, it’s not out-and-out popular among retail investors. That’s primarily because they think it’s far more convenient to stash money in savings bank accounts than in any other investment avenue.

What adds to this is a lack of awareness among people regarding this amazing investment option called liquid funds. A lot of investors tend to keep a sizeable balance in their savings bank accounts for a long time, mostly because of safety concerns. What they don’t understand is that saving in mutual funds has far more benefits than not saving in them.

Investor’s blind trust on fixed income options keeps them from earning good returns on their invested money. Hence, the wisest thing to do is to evaluate all investment options available in the market, even the short-term investment options that exist and assess their suitability to the kind of financial goals you have. This way, you will be able to come up with the best investment instrument suited to your needs and financial goals.

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