What Are Liquid Mutual Funds?


Liquid funds come under the “debt mutual fund” category and they invest in short-term debt instruments and money-market bonds. Their NAV (Net Asset Value) is calculated for an entire year (365 days); however, they have a maturity of up to 91 days. Liquid funds generally invest in treasury bills, certificates of deposit, commercial papers, and government securities. Since these funds have a shorter maturity period, they pose the least interest rate risk to the investor among all categories of debt mutual funds. Liquid mutual funds generally offer better returns compared to a savings account.


Features & Benefits Of Investing In Liquid Funds:


COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Here are the key features and benefits of liquid mutual fund investments:


  • Liquid funds charge an expense ratio in lieu of offering fund-management services: Liquid mutual funds, too, charge an expense ratio from the investor for managing their fund. The expense ratio is a percentage of the total assets of a mutual fund. Generally, debt fund investors invest in liquid funds that charge a lower expense ratio to maximise their returns.
  • These funds do not have a lock-in period: Liquid funds do not penalise investors who wish to withdraw funds from their liquid fund investment. These funds also don’t have a lock-in period. Liquid funds, therefore, offer high liquidity to the investor.
  • Liquid funds do not charge entry or exit load fee: These funds do not charge an entry or exit load fee from the investor.
  • These are low-risk investments: Liquid mutual funds are not affected by market volatility since their maturity period is relatively short. Their NAV is generally stable. However, in the case of the credit rating of an underlying security dropping, however, the NAV of a liquid fund can drop too.

Who Should Invest In A Liquid Mutual Fund Scheme?


Three categories of investors generally invest in a liquid mutual fund scheme:


  • Investors who wish to invest for the short term: With a 91-day-long maturity period, liquid funds are ideal for investors who wish to invest for the short term.
  • Investors looking to invest in equity funds through STP: Investing in a Systematic Transfer Plan helps investors get returns from the money parked in liquid funds and also helps them reduce the overall risk that accompanies equity fund investments.
  • Investors who wish to temporarily park their funds for the short term: Investors who are unsure about how they wish to invest their corpus can temporarily park their amount in a liquid fund.

Investors must use a mutual fund SIP calculator to plan their liquid fund investments and re-assess them regularly to optimise overall returns.


(This article is part of IndiaDotCom Pvt Ltd’s Consumer Connect Initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The IDPL Editorial team is not responsible for this content.)