Liquid Funds best source to keep your money liquid

Liquid Funds

Liquid funds are a type of mutual funds that invest in securities with a residual maturity of up to 91 days. Assets invested are not tied up for a long time as liquid funds do not have a lock-in period.

Liquid Fund is a type of  debt mutual funds. These are open-ended schemes which have a short-term investment horizon. These invest in money market instruments like the certificate of deposit, treasury bills and commercial paper of up to 91 days.

The investment objective of Liquid funds is to preserve capital and provide income via creating ample liquidity. For this, the fund manager of liquid fund invests only in investment grade debt instruments.

You can choose to invest for a few days or months depending on your financial needs. The fund returns are according to the prevailing market rates. The best part is that there is no exit load applicable for liquid funds. These are available in variants like Daily/Weekly/Monthly Dividend and Growth option.

You can earn steady returns over a short time intervals. Moreover, you can redeem a part or the entire amount of investment within 24 hours.

Liquid Funds

Benefits of liquid funds

  1. Least Risk: Liquid funds carry the least level of risk and are the least volatile among all types of debt mutual funds due to their extremely short maturity period and the fact that these funds mostly invest in instruments with high credit ratings.
  2. High Liquidity: Liquid funds provide unmatched liquidity to investors since the money remains invested for such a short period of time. Thereby, these funds allow investors to redeem their investments as and when required. On redemption, your proceeds from liquid funds are credited to your account within 1-2 days.
  3. Instant Redemption: Some liquid funds offer the facility of instant redemption (such as ICICI Liquid Fund). This means that on placing a redemption order online, you immediately get the proceeds in your bank account. However, market regulator SE-BI (Securities and Exchange Board of India) has capped the amount of instant redemption to Rs. 50,000 or 90% of portfolio value, whichever is lower. Some mutual funds have linked liquid funds to debit cards such as reliance mutual fund. The Reliance Any Time Money Card allows withdrawals of:
  • Up to 50% of the balance in your Reliance Liquid Fund account or
  • Up to permissible limit determined by the bank or
  • Rs. 50,000 whichever is lower at Visa enabled ATM’s.

Advantages

Built-In Diversification

Investing in a diversified portfolio can be very expensive. The nice thing about mutual funds is that they allow anyone to hold a diversified portfolio. The reason why investors invest in a diversified portfolio is because it increases the expected returns while minimizing the risk.  Therefore, many see mutual funds as a cost effective way to achieve this.

Liquidity

Another nice advantage to mutual funds is that the assets are liquid. In financial jargon, liquidity basically refers to converting your assets to cash with relative ease. Mutual funds are considered liquid assets since there is high demand for many of the funds in the marketplace. Since this is the case, an investor can convert the asset to cash by quickly selling it to another investor.

Professional Management

Mutual funds do not require a great deal of time or knowledge from the investor because they are managed by professional fund managers. This can be a big help to an inexperienced investor who is looking to maximize their financial goals.

Ease of Comparison

Mutual funds are also convenient because they are easy to compare. This is because many mutual fund dealers allow the investor to compare the funds based on metrics such as level of risk, return and price. Because the information is easily accessible, the investor is able to make wise decisions.

Disadvantages

Cost

One downside to mutual funds is that they have a high cost associated with them in relation to the returns they produce. This is because investors are not only charged for the price of the fund but they will often face additional fees. Depending on the fund, commission charges can be significant. You will also need to pay a fee that will go towards the fund manager.

Index Does Better

In some cases, the stock index may outperform the mutual fund. However, this is not always the case as it depends in large part on the mutual fund the investor has invested in, as well as the skill set of the fund manager. Therefore, it is a good idea to do your research before investing in a fund. If the historical data indicates that it consistently under-performed compared to an index, then it is not a wise investment.

Fees

The fees that are charged will depend on the type of mutual fund purchased. If a fund is riskier and more aggressive, the management fee will tend to be higher. In addition, the investor will also be required to pay taxes, transaction fees as well as other costs related to maintaining the fund.

Unpredictable

Although expected returns will be quoted, it is impossible to find a mutual fund with a guaranteed return. This is because all assets carry some degree of risk. However, some mutual funds will carry a higher level of risk than others depending on how well it is diversified.

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