I had read on your website that liquid funds have a very small chance of facing losses. I would like to know where liquid funds invest. I would also like to know what will happen to tax-saving funds after the DTC. Will they be shut down?
-SPS Jain
To answer your first question, liquid funds invest in money market instruments. They never invest in equities. Under debt, they invest in lower period debt, which is of less than 91 days. This is mandatory for liquid funds. It is because of such investments that they don’t have valuation risks, although there is the possibility of them facing losses or not generating returns for a period of 1 to 2 days. However, until now, liquid funds have never faced losses for even one day. Coming to tax saving funds, they will continue to stay live even after the DTC comes into effect. Once the three year lock-in period ends, they will be treated as regular equity funds and long-term returns from them will continue to remain tax-free.
This article was originally published on December 29, 2011.
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