Things You Should Know Before Investing in Liquid Funds

Liquid funds are among one of the safest investment options in the mutual fund market. People who previously used to invest in FDs and RDs are slowly shifting toward these schemes and the main reasons behind that are the difference in returns that these schemes have and the low-risk factor associated with them. In this post, we are going to discuss this category and will have a look at the performance these schemes have shown over the years.

What Are they?

Liquid funds are mutual fund schemes that fall in the debt category. These schemes share a common objective of providing moderate returns with low risk and high liquidity by investing in a mix of short-term debt and money market instruments. In simple terms, these are the funds in which you can invest your amount for short period of time without worrying about lock-in period or exit load charges. Liquid mutual funds invest mainly in debt instruments which have a maximum maturity of 91 days. These funds are one of the safest investment options available today as they invest only in high rating instruments. As for the liquidity factor, you can redeem your investment after 24 hours of allotment of units and the amount will be transferred to your bank account within a single day. Some AMCs (eg. Reliance Mutual Fund) have also provided investors with debit cards through which investors can redeem their money instantly. Some of the top performing schemes from this category are Reliance Liquid Fund, Aditya Birla Sun Life Liquid Fund, and ICICI Prudential Liquid Fund. To see other top performing liquid funds, you can visit MySIPonline.

Performance Analysis

Liquid funds have been providing consistent returns over the years. The average trailing returns given by the category in 1, 3, and 5 years are 6.86%, 7.29%, and 8.03%, respectively (as on Jul 06, 2018). These schemes showed a drop between Jun 2009 and Jun 2010 but recovered from it soon.

Risk Associated

Liquid Mutual Funds are the least risky, but not risk-free. As we know that it invests in debt instruments like bonds, debentures, FDs, etc., with a maturity period of 60 to 91 days. Now, let's say an instrument fails to pay up the interest even after the maturity is over, in that case, the ratings and market price of the instrument drop will also affect the NAV of the associated scheme. But this thing is highly unlikely to happen as most of the instruments are sponsored by government and top-notch brands. Other than this there is no particular risk involved. So investors who are new to mutual market can also consider investing in these schemes, without worrying about losing their principal amount.

With the above information, now you have the idea of what liquid mutual funds are and what kind of returns you can expect from such schemes. So if you are the kind of investor who wants to play safely in the mutual fund market and is looking for short-term investment, then liquid funds are what you need. For making investments in liquid mutual funds, you can visit MySIPonline and can enjoy our hassle-free process.

Let the money workout instead of resting in bank

A saving bank account is one of the many financial essentials. Nowadays, every single monetary transaction is carried out through the bank like, online transfer of funds, auto-debiting EMI, online shopping, etc. But, people often confuse saving in the bank accounts with investing. The money in your account will earn a mere 4% rate of interest that is calculated through simple interest. Why to just stack your money when it can do miracles with mutual fund investing.

People take up bank deposits as their method of storing money because they consider it to be secure and liquid. By liquid, it means that the cash can be withdrawn from the account at any time. Often mutual fund is associated with long-term capital gains. But, what about the investors who have short-term investment perspective? Will they have to restrict themselves to savings? The answer is no. A mutual fund is called a one-stop destination for all your investing needs. Hence, not a single client’s desires are ignored, whether it may be a long-term investor or a short term. Mutual fund experts have come up with an innovative idea of short-term investments that are equivalent to cash in hand and the same time facilitate money multiplication. The scheme is called liquid mutual fund. The name has been selected owing to its capability of any time withdrawal.

The best liquid funds have been launched with a view to providing an opening for the investors who have unused surplus amount for a short period. For example, Amit, an IT professional, has extra money worth Rs. 50,000. He ought to purchase a bike with it. The market analysts speculate a fall in the prices of bikes within coming three months. Thus, for the span Amit wants to invest money as the cash in hand would attract him to spend. On his friend’s advice, he invested in one of the best liquid funds after thorough research. The investment earned him a return of 8% which facilitated the growth of his money. He was able to save and invest at the same time given the short span.

Liquid funds always show a trending graph. The statement implies that liquid funds remain unaffected by the market fluctuations. They always trend upwards even if the market goes down. The reason is the short spell and the investment mechanism it follows. The investment is realized in money market instruments like the certificate of deposit, treasury bills, etc. These instruments have a maturity period of 91 days.

One can observe that the element of equity investment is absent from liquid funds which makes the scheme much more secure. The clients can easily redeem their liquid fund holdings. A request has to place for redemption on any of the working days before the stipulated time, i.e., 2 p.m. The request will be processed, and the amount will be credited to your account by the next morning. Liquid funds also provide you with the facility of altering your withdrawal amount. For example, a client has deposited Rs. 60,000 in one of the top liquid fund plans for three months. But, after one month he requires withdrawing Rs. 20,000. He is permitted to do so and let the remaining Rs. 40,000 be invested in the same scheme to enjoy the benefits.

Catering to the needs of the short-term investment, liquid funds do not have any exit load. The exit load signifies the penalty or the fees that are charged on before maturity withdrawal of your invested amount. The clients are free to redeem the investment at any point of time.

As compared to the opponent (bank deposit), liquid funds are gaining momentum among Indian investors. The clients are happy with investing rather than simply saving. Liquid funds have certain types viz, growth and dividend. The customers who opt for the growth scheme receive a lump sum amount including the growth value at the maturity of the plan. But, bonus plan will supply the clients with a regular income from the profit during the tenure of investment.

Thus, liquid funds like Kotak Mutual Fund Treasury Advantage Fund and Reliance Money Manager Fund can be the most convenient avenues for the investors to deploy their riches for a short period and earn prolific returns.