All You Need to Know About Liquid Funds

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There are times when we have an influx of surplus funds. In these times we think of investing them so as to earn some good returns. There are many options such as Savings bank account, Fixed deposits etc. One more option you can consider is investing in Liquid Mutual Funds.

Here’s everything you need to know about Liquid Funds.

What are liquid funds?

Liquid funds are a type of debt mutual funds scheme. In this scheme, you invest your money in debt and money market securities. The maturity period for these is 91 days. Hence this is a short term investment in an open-ended debt fund. The market instruments can be commercial papers, treasury bills, certificate of deposits, term deposits, call money etc.

Who should invest in liquid funds?

The following types of investors should consider Liquid Fund Investments:

  • Investors who want to meet short terms goals with fewer risks
  • Investors who want to park a certain portion of their contingency fund
  • Investors who want to diversify their portfolio
  • Investors who need money in the immediate future

Uses of Liquid Funds

You can use a liquid fund investment to gain some short term returns. Also if you need money in the near future then you can invest a part of your saving in liquid funds. You can use it to invest your emergency or contingency fund. You can also use liquid funds to invest a lump sum amount and later stagger those investments as systematic transfer plans in equity funds.

How quick can you redeem money from liquid schemes?

You need to submit a redemption request to get the money. Once the request is submitted the money gets deposited in the account in a day. Few AMCs provide the facility of instant redemption until a minimum amount. This lets you get the money instantly.

Risks Involved in investing in Liquid Mutual Funds

No investment is ever risk-free. Liquids just have a lower level of risks as compared to other funds. Even liquid funds invest in securities which have a market price. Yet, a liquid fund’s NAV does not fluctuate like the usual mutual fund securities.

As per SEBI’s regulations, if security matures in 60 days then it does not have to market to market. The interest earned will be divided by the total number of days the security was held. Hence the movement of the NAV is linear.  

But this does not mean that liquid mutual funds are risk-free. If the fund you have invested in defaults, then the credit rating drops and so does the market price. This leads the NAV to drop too.

How to select a liquid fund?

When you search for a liquid mutual fund for investment, you should choose one with a good track record and also with a low expense ratio. You need to check the quality of the portfolio and also the credit ratings. If it is a quality portfolio, then default risks are less. Liquid mutual funds are an avenue for short term investments and to earn some good returns. Yet you should choose a fund carefully and the above guide can help you with it.

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