What is the difference between Liquid and Liquid Plus funds? Do Liquid Plus funds give more liquidity or more return or are they more tax efficient? Kindly explain the fundamentals behind them. -Amit Das
Many people get confused as the nomenclature of Liquid Plus schemes gives an impression of something additional. The major difference between Liquid Fund and Liquid Plus fund is the maturity profile of the underlying instruments. The debt instruments held by liquid plus funds have a longer tenure than those of liquid funds. Hence, the average maturity of liquid plus funds is higher than that of liquid funds.
Liquid funds invest in debt instruments that have a very short maturity. Liquid plus funds invest in instruments that have a longer tenure and are therefore subject to more risk. Liquid plus funds are a variation on the liquid fund theme. Liquid plus funds are somewhat riskier, but at the same time they offer slightly higher returns and are subject to lower taxation.
Dividend distributed by liquid plus funds is subject to an effective tax rate of 22.7 per cent while plain liquid funds' dividends are taxed at 28.3 per cent (in case of individual investors). Moreover, in some Liquid Plus Funds there may be an exit load while there is no exit load on liquid funds.
In a recent move, SEBI has made a set of changes to the rules governing Liquid Funds. In order to increase their safety, it has now mandated that liquid fund managers rein in their maximum maturities to six months by February 1 and further to three months by May 1. SEBI has also asked for a change of names of Liquid Plus funds as they give a wrong impression of added liquidity.