Liquid funds are schemes that invest in financial instruments such as bank deposits, treasury bills, commercial paper, and other securities that mature in 90 days. The Net Asset Value (NAV) is calculated annually unlike other debt mutual funds where NAV is calculated for business days only. These funds have no lock-in period and funds can be withdrawn within 24 hours. The liquid funds have the lowest risk associated across all debt funds. The sole reason is that these funds invest in fixed income securities with short maturity. Besides this, the liquid funds do not have entry and exit load.
Who should invest in liquid funds?
Any investor looking to park their surplus funds can consider investing in these funds. The returns generated by these funds are up to 7%-8% per annum. You should invest all your emergency corpus in the liquid funds as the maturity will be done next day and the requisite funds will be released into your savings bank account. Ideally, these funds are used to diversify your portfolio among debt funds or meet short-term financial goals. Some mutual funds also offer redemption and realization of funds within the same day itself. As these funds can generate better returns as compared to saving bank, which offers 3.5%-65%, depending upon the bank. The nature of the portfolio is that these funds cannot afford to make much risk, and you should invest in AAA rated liquid funds only.
1. Fund’s Objectives: As liquid funds are the least risky amongst all debt funds. The NAV of the mutual fund does not fluctuate frequently as the investment is made in fixed maturities. Also, this prevents the fund to undergo any sudden price change with the rise or fall in interest rates. However, there can be a sudden drop in the NAV if the security is downgraded. Therefore, liquid funds are not completely risk-free as compared to other traditional saving schemes.
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2. Expected Returns: Even though the liquid funds do not offer secured returns, but they have generated up to 8% returns in the past 3-5 years.
3. Expense Ratio: Liquid funds managers charge a fee, in terms of expense ratio, which is regulated by SEBI, and the maximum limit is capped at 2.25%. Considering the hold strategy, liquid funds have a lower expense ratio in order to provide higher returns to the investors.
4. Time Horizon: Investment in liquid funds should be made keeping in mind the time horizon i.e. up to 3 months. In case, you have a long-term horizon, you can invest in ultra-short term funds or low duration funds.
5. Financial Goals: Every financial goal should include an emergency corpus, wherein an investment in the liquid fund can be useful. In addition, to receive higher returns, these funds help you to ease out in case of any emergencies.
Investing in liquid funds can be a bit jittery. Most of the online platforms highlight 5-star liquid funds as they have given higher returns while investing in AA rated securities. You should simply invest wisely and stay savvy!