What Are Liquid Funds and How They Works?

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Are you new to the term liquid funds? It is a category of the mutual fund. The unique thing about this type of mutual fund investment is that it invests in money market and debt securities. Also, most importantly, these securities carry a maturity of just 91 days maximum. It can include bank term deposits, certificates of deposits, commercial papers and treasury bills to name a few. The assets invested in these funds are not tied up for a longer period. The reason is that liquid funds do not carry a lock-in period. 

You might wonder how much return you can expect from these funds. You cannot expect any guaranteed returns from these funds. Do you know why? The performance of this fund relies upon the market performance. Nevertheless, an investor thinking about better returns prefer these funds against fixed deposits. The reason is that fixed deposits give only a fixed return. But, the chances of better return make liquid funds interesting. When the market booms, more return is possible. But, the risk is more as the market can fluctuate and can even go down at times.

Who Should Invest in Liquid Funds?

Liquid fund’s generally invest in instruments with fixed income. This is done to ensure liquidity to investors and for capital protection. So, the fund managers invest only in high-quality instruments. So, liquid funds are safer compared to other mutual funds. They are indeed risker as compared to fixed deposits. So, are you a person with low to medium risk tolerance ability? Then, you can confidently choose to invest in liquid funds. The reason is that they offer better returns compared to fixed deposits.

How Do Liquid Mutual Funds Work?

The main goal of any liquid fund is to ensure not just liquidity but also capital protection. So, the fund manager ensures the selection of high-quality debt securities for investing. He does it according to the mandate of the scheme. He also makes sure that the average maturity of the portfolio is less than 91 days. The fund manager will try to deliver better results. He will do it by matching the maturity of your portfolio to the maturity of particular securities.

 

How Are Liquid Funds Beneficial?

When you choose to invest in liquid fund’s, you can expect the benefits listed below:

Benefits of Liquid Funds

  • Compared to current and savings bank account, liquid funds can bring better returns. 
  • As the investment is made in instruments that carry high credit ratings, these funds are the least volatile.
  • Most liquid funds do not carry exit loads.
  • As compared to debt funds, liquid fund’s are known to carry the lowest interest rate risk. The reason is that when you invest in these funds, your money is invested by fund managers basically in fixed income securities. Also, the securities carry short-term maturity.

Key Features of Liquid Funds:

  1. Possibility to Invest for a Shorter Period: Do you look for a source to park or invest your money for a short period? Do you look to get the return within a few months or weeks? If so, liquid funds can be the most efficient financial instruments for you. Of course, similar to other mutual funds, you cannot guarantee any return of interest or principal when you invest in liquid fund’s. Nevertheless, the very structure of these funds makes them the right choice for investing funds even for a shorter period. This would be a beneficial move against keeping the money in an interest-earning financial instrument with fixed investment period.
  2. Withdrawal at Any Time: As no fixed term is involved, you have the option to take out your money at any point in time. You will be surprised to know that you can withdraw the funds even the next day of your investing. Moreover, you can earn accrual for every day of your investment.
  3. No Redemption or TDS: As against some instruments, where tax is deducted at the source at the time of redemption, liquid funds do not carry any TDS on redemption.
  4. No Exit Load: The fee charged for exiting the fund before the due date or exit load is not applicable in liquid funds. This rule applies in most cases when investing for a week or longer. So, you can experience a reduction in the investment expenses that are common in other types of mutual fund investments.
Conclusion:

Liquid fund’s are open-ended schemes. Here, the money is invested both in money market instruments and debt with a short maturity period. So, this feature of liquid funds mitigates the risk from volatility in the interest rates. In turn, you can gain high liquidity in your portfolio and can generate stable income. What are you waiting for? Start planning your investment in a liquid fund!

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