A Guide To Investing In Icici Liquid Funds

ICICI Prudential Liquid Fund is a mutual fund that invests in bonds with a maturity period of up to three months. It offers reasonable returns with low-risk levels and high liquidity. The fund seeks to invest approximately 80% of its corpus in money market securities, with the remaining 20% in high-quality debt instruments. This diversification ensures better capital protection and liquidity for investors. With no lock-in period, negligible risk, and instant redemption options, ICICI Prudential Liquid Fund is a popular choice for those seeking low-volatility debt funds.

Where to buy ICICI liquid funds

ICICI Prudential Liquid Fund is an investment fund with a moderate risk profile. The fund seeks reasonable returns, with low risk and high liquidity. It invests in bonds with a maturity period of up to three months, and money market securities and high-quality debt instruments make up the majority of its corpus.

You can buy ICICI mutual funds directly from the ICICI Prudential Mutual Fund website. Other platforms that sell ICICI mutual funds include MF Central and MF Utility. If you are uncomfortable buying mutual funds online, you can seek help from a mutual fund distributor, including most banks.

Taxation on ICICI liquid funds

Holding Period

The holding period refers to how long you hold the investment before redeeming it. In India, there are two categories for holding periods:

• Short-term Capital Gains (STCG): If you redeem your liquid fund units within 3 years of purchase, any gains are considered STCG.
• Long-term Capital Gains (LTCG): If you hold your liquid fund units for more than 3 years, the gains are categorised as LTCG.

Date of Investment

The tax implications for ICICI liquid funds also depend on whether the investment was made before or after 1 April 2023.

Investments Made on or After 1 April 2023

For ICICI liquid funds, if the investment is made on or after 1 April 2023, the entire amount of gain is added to the investor's income and taxed according to their income tax slab rate. This means the tax rate will depend on the total income earned in a financial year.

Investments Made Before 1 April 2023

For ICICI liquid funds investments made before 1 April 2023, different tax rules apply depending on the holding period:

• Sold within 3 years from the date of investment: Gains are added to the investor's income and taxed according to their income tax slab rate.
• Sold after 3 years from the date of investment: Gains are taxed at a flat rate of 20% after providing the benefit of inflation indexation. This benefit reduces the taxable gain, potentially lowering the tax burden.

Dividends

Dividends received on ICICI liquid funds are added to the income of the investor and taxed according to their income tax slab rate. Additionally, if an investor's dividend income exceeds Rs. 5,000 in a financial year, the fund house deducts a Tax Deducted at Source (TDS) of 10% before distributing the dividend.

Risk and return on investment

Risk

ICICI liquid funds are generally considered to have moderate risk. While the risk of incurring a loss in these funds is negligible, it is not impossible. There have been rare instances where liquid funds have incurred losses. These funds are designed to provide a high level of liquidity and reasonable returns while maintaining low-risk levels. The fund has a moderate rating on SEBI's Riskometer, indicating a balanced approach to risk.

Return

ICICI liquid funds aim to provide returns that are marginally higher than those of a typical bank account. The returns are steady but relatively low, making them unsuitable for long-term wealth accumulation. These funds are ideal for short-term investment objectives, typically ranging from 1 to 5 years or slightly longer. The annualised return of the ICICI Prudential Liquid Fund Regular Plan Growth has been around 7.13% over 18 years. The fund also offers a reasonable return with a 5-star rating in the Debt category.

It's important to remember that past performance does not guarantee future results, and mutual funds are subject to market risks. The returns may vary based on economic conditions and other factors. Investors should carefully consider their investment goals, time horizon, and risk tolerance before deciding to invest in ICICI liquid funds or any other financial instrument. Diversification and a long-term investment horizon can help mitigate some of the risks associated with market volatility.

How to redeem your investment

If you have invested in ICICI Prudential Liquid Fund via ET Money, redeeming your investment is simple. Log in to the app, navigate to the investment section, and submit a redemption request. Alternatively, if you have invested through a different platform, you can submit a redemption request through the ICICI Prudential Mutual Fund website.

Liquid funds are considered safe due to their high liquidity quotient. They are debt instruments that invest in assets with a maturity tenure of up to 91 days, primarily in the most liquid money market instruments. This short maturity period ensures better capital protection and high liquidity for investors.

Liquid funds are subject to taxation similar to other debt funds. If you hold the fund for less than three years, short-term capital gain taxes will be levied according to your current tax slab. If held for more than three years, long-term capital gain taxes at a rate of 20% with indexation benefits will apply.

It is important to note that there is no lock-in period for liquid funds, allowing investors to redeem their investments at any time. Additionally, these funds offer instant redemption facilities, with most providing redemption of up to ₹50,000 per investor per day.

ICICI liquid funds vs other investment options

ICICI liquid funds are a type of mutual fund that invests in bonds with a maturity period of up to three months. They are designed to provide reasonable returns with low risk and high liquidity, making them suitable for short-term investment goals. While ICICI liquid funds offer slightly higher returns than a typical bank account, they are not intended for long-term wealth accumulation. Here is a comparison of ICICI liquid funds with other investment options:

ICICI Liquid Funds vs. Other Mutual Funds

ICICI Prudential Liquid Fund is one of many liquid funds available in the market. Other options include the Aditya Birla Sun Life Liquid Fund, UTI Liquid Fund, and HSBC Liquid Fund. When choosing a liquid fund, it is important to consider factors such as the fund's historical performance, expense ratio, and the credit quality of its holdings.

ICICI Liquid Funds vs. Fixed Deposits

Fixed deposits are a type of investment that offers guaranteed returns, often with a fixed interest rate. While ICICI liquid funds do not provide guaranteed returns, they offer the potential for higher returns than fixed deposits, albeit with a slightly higher risk level.

ICICI Liquid Funds vs. Equity Investments

Equity investments, such as stocks, offer the potential for higher returns over the long term compared to ICICI liquid funds. However, equity investments also come with a higher level of risk. ICICI liquid funds are considered a more stable and conservative investment option, making them suitable for risk-averse investors.

ICICI Liquid Funds vs. Short-Term Funds

If you are looking for alternative short-term investment options, there are specific short-term mutual funds, such as the ICICI Pru Short Term Fund, that may be worth considering. These funds typically have lower expense ratios and no exit load, making them a cost-effective option for short-term investment goals.

In conclusion, ICICI liquid funds offer a moderate-risk, liquid investment option with potential returns that are marginally higher than those of a bank account. When deciding whether to invest in ICICI liquid funds or explore other investment avenues, it is essential to consider your financial goals, risk tolerance, and investment horizon.

Frequently asked questions