Short term debt and money market instruments

Incorrect – No, this is not quite right. As the name suggests, ‘liquid funds’ invest in short term debt and money market instruments with maturity up to 91 days only. These handpicked instruments are also high quality. This is to ensure high liquidity of the scheme which is one of its main objectives. The investable instruments include debt instruments such as G-secs, high quality bonds and money market instruments such as treasury bills, commercial paper, commercial bills.

Correct – Yes this is right. Liquid funds invest in an array of high-quality debt instruments such as G-secs and high rated bonds as well as money market instruments such as treasury bills, commercial paper etc. These instruments are very short term, with a maturity of up to only 91 days. Their high quality also keeps overall risk of the scheme low.

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Incorrect – You are partially correct. While earning reasonable returns is one of its objectives, it is not the only objective. Apart from earning reasonable short term returns for investors, liquid funds are also meant to provide high liquidity at low risk levels. This is why it invests in high-quality, short-term debt instruments.

Incorrect – You are partially correct. While providing safety and liquidity is one of its core objectives, it is not the only objective. Apart from this, liquid funds also seek to earn reasonable returns, potentially better than conventional savings means, over the short term.

Correct – You are right. Liquid funds have a two-fold objective. Ideal for the short term, it seeks to earn returns that are higher than what you can earn through traditional savings means in the short term. At the same it seeks safety of investors capital and high liquidity for their short-term needs.
All in all, investors looking for a short-term avenue to invest their funds can opt for liquid funds.

Very short – less than 1 year

Correct – Liquid funds are ideal for a very short term – most often less than 3 months up to a year. They are a good option for investors who want to park their funds temporarily for near term goals and for who safety and liquidity is a key criterion.

Incorrect – Liquid funds are best meant for very short-term investing time frames for when safety and high liquidity is key. For longer time frames, investors may consider other more lucrative investing options.

Incorrect – Liquid funds are best meant for very short-term investing time frames for when safety and high liquidity is key. For longer time frames, investors may consider other more lucrative investing options.

All of the above

Incorrect – While this is partially true, Liquid funds offer several benefits. The fact that they have no entry or exit load and no lock-in period and invest in short term instruments gives them high liquidity. They also invest in high quality instruments keeping risk levels low and also offer reasonable returns to investors for the short-term investing time frame.

Incorrect – While this is partially true, Liquid funds offer several benefits. The fact that they have no entry or exit load and no lock-in period and invest in short term instruments gives them high liquidity. They also invest in high quality instruments keeping risk levels low and also offer reasonable returns to investors for the short-term investing time frame.

Incorrect – While this is partially true, Liquid funds offer several benefits. The fact that they have no entry or exit load and no lock-in period and invest in short term instruments gives them high liquidity. They also invest in high quality instruments keeping risk levels low and also offer reasonable returns to investors for the short-term investing time frame.

Correct – You are correct; Liquid funds offer all these benefits. The fact that they have no entry or exit load and no lock-in period and invest in short term instruments gives them high liquidity. They also invest in high quality instruments keeping risk levels low and also offer reasonable returns to investors for the short-term investing time frame.

Low to moderate risks

Incorrect – This is not correct. Liquid funds invest in debt and money market instruments and of high quality. Hence, they are not susceptible to high market risks that equity investments are typically subjected to.

Correct – Yes, you are right! Liquid funds invest in high-quality, short-term debt instruments keeping liquid fund risk such as interest and credit risks low/moderate.

Incorrect – This is not correct. Liquid funds invest in debt and money market instruments, which are not completely risk free. They have interest rate and credit risk. However, the nature of instruments chosen (high quality and short term) keep this risk levels low for investors.

False

Incorrect – This is not quite right. Redemption gains earned from liquid funds are taxed as capital gains in the hands of investors. The Fund house is not required to deduct TDS from these proceeds. The onus is on the investor to quantify and pay tax on these returns as per his/her applicable slab rate. This makes it a more tax efficient short-term investment.

Correct – You seem to have good knowledge of liquid fund investing. Tax on liquid funds differs from tax on deposits. Unlike bank interest, redemption gains of liquid funds are not subject to TDS. They qualify as capital gains and are taxed as such in the hands of the investor without any deduction of TDS on redemption.

Open ended and can be liquidated at discretion of investor.

Incorrect – You are mistaken in this aspect. Liquid funds as rightly names are highly liquid. They are open ended with no entry load or exit load (usually nil after 7 days). This means they can be easily liquidated at the wish of the investor.

Correct – Yes you are correct. Liquid funds are highly liquid and can easily liquidated when the investor is need of funds. They do not charge any exit load (usually beyond first 7 days), nor do they have any lock in period. The redemption proceeds usually get credited in 1-2 working days. Some AMCs also offer an instant redemption facility to some extent which makes these funds even easier to liquidate.