Here are five reasons why you must consider liquid funds as an investment option!
Debt funds are one of the mutual fund variants available as an investment option. This type of mutual fund focuses on investing in government securities, commercial papers, treasury bills, and different money market instruments. They are securities that are known for generating fixed income. However, investing in a debt fund is insufficient; you must select a suitable variant. One of these debt fund variants is liquid funds.
What are liquid funds?
Liquid fund investment is towards fixed-income instruments with a maturity of approximately 91 days. One of the salient features of these funds is that your withdrawals might get processed within a day. Moreover, these debt funds supposedly come with one of the lowest interest-rate risks.
How do liquid funds work?
The fund manager managing your mutual fund portfolio selects high-rate debt instruments maturing in approximately 91 days. The proportion of fund allocation here depends on the fund’s investment objective. The fund manager ensures that the mutual fund portfolio’s average maturity remains approximately three months. An average maturity of nearly three months reduces the sensitivity of fund returns to interest rate movements. This act makes liquid funds less vulnerable. Because of shorter maturity, the fund is not impacted by interest rate changes. A fund manager attempts to deliver high returns by comparing the portfolio’s maturity with the maturity of individual securities.
Why invest in liquid funds?
Here are a few reasons why you must invest a portion of your income in liquid funds:
1. Short tenure
They allocate funds to short-term fixed-income instruments. Therefore, this mutual fund investment is a viable option for parking surplus income. Unlike equity funds, which suit long-term investors, liquid funds come with short-term maturity and high liquidity. These funds are a viable option for building an emergency fund, i.e., a fund accessible for unexpected emergencies.
2. Low Risk
The 91 days maturity period makes a liquid fund one of the safest investment options. As the underlying financial securities come with a short-term maturity, liquid funds have minimum risks. Also, they invest in high-rated money market instruments, further lowering the risk levels.
3. No lock-in tenure
These funds don’t have a lock-in period. Hence, redeeming a liquid fund is easy. Redeem your investments whenever you want, and your requests might get approved as quickly as a day. Also, some liquid funds might allow an instant withdrawal of up to a certain amount. Moreover, there is no exit load on liquid funds after seven days.
4. High liquidity
Liquid funds diversify your mutual fund portfolio by adding a few equity investments with debt securities. This balance of short and long-term investments not only serves as a hedge against investment risks but also offers wealth creation for emergency funds.
5. Low Expense ratio
The expense ratio of liquid mutual funds is not high because they invest in A-rated securities. The low expense ratio and no exit load generate a higher take-home return.
Apart from the five above, there are numerous other reasons why you must consider investing in liquid funds. However, before choosing one, consider a few factors such as past performance, the credit of the underlying securities, and the liquid fund’s size. Apart from that, be cognizant of the required investment amount. You can use an online SIP calculator to determine the investment amount if you are investing through a systematic investment plan.