What are liquid funds?

Market conditions exhibit rapid fluctuations within short time frames, and financial fortunes can be gained and lost within days. Concurrently, investment opportunities have evolved into a domain characterised by diversity and complexity.

Enter the world of liquid funds, a gateway to earn steady returns while maintaining easy access to your money.

What are liquid funds?

Liquid fundsare debt mutual funds that invest in fixed-income instruments with maturities of up to 91 days. These instruments include treasury bills, commercial paper, and certificates of deposit. In simpler terms, you pool your money with other investors, and the fund manager invests it in these short-term, low-risk securities.

A liquid fund’s net asset value (NAV) is calculated daily, ensuring transparency and real-time valuation for investors. Additionally, the expedited processing time for withdrawal positions liquid funds as an efficient choice for those seeking prompt access to their funds. Importantly, these funds exhibit the lowest interest-rate risk within the broader debt funds category.

Key features of liquid funds:

  • High liquidity: As the name suggests, liquid funds offer high liquidity. You can redeem your investments anytime within 24 hours, making them ideal for short-term financial needs.
  • Low risk: Due to their short maturities and investment in high-quality securities, liquid funds are considered low-risk investments. They are less prone to interest rate fluctuations and market volatility compared to other debt funds.
  • Better returns than savings accounts: Liquid funds typically offer higher returns than regular savings accounts. While savings accounts currently offer around 4% interest, liquid funds can provide returns in the range of 7-9%.

Should you invest in liquid funds?

Liquid funds are a good fit for several investor types:

  • Individuals with surplus cash: If you have cash you might need in the next few months, liquid funds can help you earn better returns than keeping it in a savings account.
  • Emergency fund: Liquid funds can be a safe and readily available source for unforeseen expenses.
  • Setting money for future investments: If you plan to invest in equity funds but are hesitant about market volatility, you can park your money in a liquid fund until you are ready to invest.

Factors to consider before investing in liquid funds

  • Risks: While liquid funds are recognised for their low-risk profile due to the short maturity of underlying assets, it’s imperative to acknowledge that they are not entirely risk-free. Fluctuations can occur if the credit rating of any underlying security drops, impacting the NAV of the fund.
  • Returns: A cursory examination of liquid fund performance reveals an average return range of 7-9%, surpassing the returns offered by standard savings account deposits, typically hovering around 4%. The potential for higher returns is a key factor attracting investors to this category.
  • Expense ratio: Similar to other mutual fund schemes, liquid funds entail an annual fee known as the expense ratio, calculated as a percentage of total assets. It is advisable to opt for funds with a lower expense ratio, as it maximises investor gains. The relatively low turnover of securities in liquid funds contributes to maintaining a lower expense ratio.
  • Investment plan: Many investors strategically employ liquid funds to establish emergency funds due to their reasonable returns and liquidity, like savings account deposits. Given their designed three-month investment horizon, creating a well-thought-out investment plan aligned with personal financial goals is crucial.

Bottom line Liquid funds present an option for investors seeking a safe and easily accessible haven for their short-term savings. So, why settle for less interest when you can make your money work for you, even in the short term? Explore the world of liquid funds and experience the joy of watching your cash blossom into smarter savings.