Liquid mutual funds are debt funds that invest in treasury bills, government securities, and commercial papers. These things are fixed-income instruments that mature in approximately 91 days. A unique feature of this variant of mutual funds is that the NAV, or net asset value of liquid funds is calculated for 365 days. Furthermore, your mutual fund investment redemption might get processed within a day.
How do liquid funds work?
These mutual funds invest in credit-rating instruments treasury bills and certificates of deposit. A Liquid fund investment might mature in 10 days, or its maturity period might also go up to 3 months. Since the investment target of liquid funds is usually government securities, the risk factor of these funds is relatively low.
Who are liquid funds suitable for?
This type of mutual fund can help in fetching high returns. Just invest your idle cash in this short-term investment option. You can also use liquid fund investments to funnel money into equity funds. You can do so with the help of an STP, i.e., a systematic transfer plan. STPs offer dual benefits of returns in the form of liquid fund investment and averaging down the investment cost in the equity market, reducing equity investment risks. If you have recently enjoyed windfall gains but are unsure about your investment choice, use liquid funds as a short-term option.
What are the benefits of investment in liquid funds?
Financial advisors suggest investors allocate a portion of their surplus income to liquid funds because of a few benefits below:
Short tenure
They invest in short-term fixed-income instruments. Therefore, it is easier to park your money in these funds. These funds offer high liquidity and returns, because of which experts liquid funds as an option for building an emergency fund.
Low expense ratio
Liquid funds are not managed but actively. Instead, they invest in A-rated securities. Hence, the expense ratio of a liquid fund is not that high. A low expense ratio and no exit load lead to higher take-home returns.
Lower risks
A 91-day maturity period makes liquid funds a relatively safer investment option. Apart from investing in short-term underlying securities, they allocate funds to high-rated money market instruments further lowering the risk levels.
No lock-in period
Despite the 91-day maturity period, liquid funds don’t come with a lock-in period. Meaning, you can redeem your investments whenever you want. Furthermore, redemption requests are approved quickly. Also, there is no exit load on liquid funds after 7 days.
Highly liquid
High liquidity is one of the reasons why liquid funds are regarded as a feasible option for creating emergency funds. Moreover, the fund managers add a few equity investments to the investment portfolio, diversifying it. This balance of short and long-term investments serves as a cushion against investment risks, helping in wealth creation for emergency funds.
Conclusion
Liquid funds are known for having negligible risks because their short tenure ensures the least possible chances of fluctuations. A liquid fund offers high liquidity, easy redemption of units, and zero lock-in period. This is why you should consider them for building your emergency fund.