Liquid funds in mutual funds – All You need to know

Liquid funds in mutual funds are good for your short-term financial needs and have a low risk
In addition, these funds are designed in such a way that they will provide quick access to the capital and offer greater liquidity.
Moreover, they will invest primarily in low-risk debt instruments.
And these funds invest in low-risk instruments. Hence the market fluctuations will not be that much in these funds.
What is a liquid fund?…
These funds are ideal for investors who want to park their money for short-term needs.
In addition, they offer somewhere that a bank savings account gives or something extra than that of a savings account.
But this ROI is not guaranteed, like in the case of a bank savings account or FD.
Definition of a liquid mutual fund…
A liquid mutual fund is a debt mutual fund that will invest in Treasury bills, commercial papers, and government papers.
In addition, these instruments will have a maturity period of 91 days only.
Moreover, the short-term nature of the securities that this fund is investing in offers greater liquidity without compromising on the returns.
How liquid funds will work?…
These funds objective is to preserve the capital, generate some revenue, and provide liquidity to the investors.
In addition, when you invest your money in this fund, your money will be pooled with other investors invested in this fund.
Now, the fund manager will invest this pooled fund in short-term Treasury bills, commercial papers, and government securities, which will mature in 91 days and are high-quality papers.
In addition, the short-term nature of this fund reduces the interest fluctuations in it.
As a result of it, your investment remains relatively stable.
Features of liquid mutual funds…
These funds offer a blend of benefits to the investors, like safety of funds and quick access to the capital.
No Loads…
These funds generally do not carry any entry and exit loads.
Hence, there are no extra costs when investing or redeeming funds.
Hence, these funds are called low-cost funds.
So, you can confidently invest in these funds, as they are low-cost and highly liquid.
Low interest rate risk…
These funds are known as low-risk short-term funds when it comes to interest rate risk.
In addition, interest rate risk is higher in debt funds, which will invest in long-term securities.
But as these liquid funds will invest short-term instruments like Treasury bills, commercial papers, and government securities, which will mature in 91 days.
As a result of it, interest rate risk is low in these funds.
Daily NAV calculation…
Nav will be calculated in these funds on a daily basis.
So, you will get information daily about the nav and the funds performance.
In addition, the daily nav declaration shows the transparency of these funds.
Finally, you can track the performance of this fund very easily.
Insta or quick redemption…
When you request a redemption of these funds.
Most of the time, the redemption will be processed within 24 hours.
In addition, this quick redemption ensures easy access to your capital when needed.
And this feature makes liquid funds more suitable for your short-term financial needs.
Advantages of liquid funds…
Liquid mutual funds offer many benefits, making them an attractive option for short-term investment needs. Here’s why you might consider investing in them:
Lower Risks…
Liquid mutual funds focus on preserving your principal and providing consistent returns.
In addition, they invest in high-quality, short-term debt instruments, which help keep the fund’s value stable despite fluctuations in market interest rates.
Moreoverr, This low-risk profile makes them suitable for conservative investors looking to avoid the potential volatility of longer-term investments.
Flexibility…
One important advantage of liquid funds is their flexibility.
In addition, you can redeem your investment without penalties after just a few days.
And this flexibility is ideal if you are looking to access your money quickly.
As it offers a convenient way to manage short-term cash needs without being locked into a long-term investment.
Better return on investmentThan bank savings accounts…
Liquid mutual funds often provide higher returns compared to traditional savings accounts.
While savings accounts offer low, fixed interest rates, liquid funds invest in short-term, high-quality debt instruments that will yield better returns.
In addition, this makes them a more attractive option for earning interest on your surplus cash.
Disadvantages of Liquid Mutual Funds…
There are some disadvantages to these liquid funds.
Tax Implications…
These funds are also treated like bankFDs only when it comes to taxation.
and the tax will be based on the income tax slab you are in.
However, there is one benefit in these funds, i.e., no TDs are there on these funds like in bank FD.
In addition, there is no need to pay any tax until you redeem the funds.
Lower returns compared to other debt mutual funds…
Lower the risk, lower will be the returns.
As these funds are low-risk funds, returns will also be low.
In addition, long-term debt funds have high risk and offer high returns as well.
When can you invest in these liquid funds? …
for short-term needs…
You can invest in these funds for your short-term needs, which are 1 year to 2 years away.
In addition, for short-term needs, taking high risk is not ideal.
Hence, investing in these funds for high liquidity and better safety is a wise option.
During a market crash or volatility…
You know that equity markets offer high ROI and high risk.
In order to get inflation-adjusted returns, you need to invest in equity.
But when markets became volatile and overbought, it was time to protect your capital.
In those situations, you redeem your money from equity and invest in these funds.
And wait for the equity market to correct.
So that you invest again in equity markets.
To get roi better than bank savings account…
There is every possibility for you to get ROI better than that of a bank savings account with these liquid funds.
So, prefer these funds over bank savings accounts.
How to choose a liquid fund…
Do some research about the expense ratio in different liquid funds before investing in them.
In addition, observe the liquid funds performance compared to its bench market and also compared to its peer average.
Finally, see who the funds manager is managing this fund.
and fund manager experience and education skills also matter a lot.
So, track the fund manager’s previous track record.
FAQS about liquid mutual funds…
Does liquid funds risk-free?
No, these funds are not 100% risk-free.
However, risk in these funds is very low.
Does this liquid fund give the same return as bank FD? ..
No, these funds may give a return equal to more than a savings bank account only.
Read the article about Debt Funds: All You Need to Know…
Also read an article about how poor people can become rich?…
And read an article about different types of loans in India.
Also read an article about How much is the profit that chit funds give?
Read article about Asset allocation and its importance – All you need to know…
1 Comment
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