Unlocking Stability: The Smart Investor's Guide to Liquid Fund Investments

Author : Bhavna lok | Published On : 14 Dec 2023

A key component of financial planning is proper money management, and liquid mutual funds have become relatively a well-liked investment option for both people and businesses. For investors aiming to grow their short-term investments, liquid funds present a compelling combination of relative stability, liquidity, and prospective rewards. The purpose of this blog is to shed light on the possibilities of mutual funds in India by examining their importance in the market, benefits, reach, recommendations to invest in liquid funds, and things to think about when choosing a fund.

Liquid funds: what are they?

A type of money market fund known as "liquid funds" focuses mostly on investing in extremely liquid and low-risk bonds such as certificates of deposit, commercial papers, treasury bills, and short-term government bonds. Liquid funds, in contrast to conventional mutual funds, usually have a short maturity period of a few days to a few months. These funds invest in high-quality fixed-income instruments to produce returns that are comparatively steady and less erratic.

Benefits of liquid fund investments

Reliability: By investing in low-risk bonds, liquid funds lessen the impact on capital. Because high-quality assets are prioritized, the default risk is reduced, making them a comparatively stable investment choice.

Money flow: The high liquidity of liquid funds is one of their main benefits. Investors have the option to partially or redeem their investment at any point, and the money will normally be credited to their bank account the next business day. This flexibility allows for quick access to money based on the needs of the investor. Additionally, resident retail investors who have liquid assets have the option of an instant redemption of up to 50,000 rupees or 90% of their invested amount, whichever is lower. This is why many investors may want to invest in liquid funds.

Potential return: Liquid funds strive to produce more potential returns than typical savings accounts while placing a priority on relative stability and liquidity. Liquid funds are a desirable option for short-term investments as, although returns may vary, they often tend to exceed market interest rates. However, unlike savings accounts, liquid funds may be vulnerable to market volatility and do not offer stable returns.

Examining India’s potential for liquid assets

Investing in liquid funds and managing portfolios has become more convenient for investors with the advent of digital platforms and mobile applications. Numerous retail investors consider this investment option due to its convenience of transactions and comparatively higher return potential than traditional methods. Market research also indicates that liquid fund Assets Under Management (AUM) in India have risen consistently.

Rules for investing in liquid funds in India

To stay in their category, liquid funds are required by SEBI to keep at least 20% of their returns in liquid instruments. Cash, government bonds like G-secs and T-Bills, and repos on G-secs are examples of these liquid instruments.
Liquid funds make sure that a significant portion of their return is liquid, which improves their capacity to fulfil redemption requests.
On the other hand, investors who redeem their liquid fund investments within seven days will now be required to pay an exit cost, according to SEBI. The purpose of this approach is to encourage fund stability and discourage short-term trading.

Conclusion

The Indian market has enormous untapped potential because of liquid funds, which provide investors with a liquid and generally stable investment option. Low-risk investing choices such as liquid funds offer investors the freedom to withdraw their money whenever they want. They put their money and invest in liquid funds that mature in fewer than ninety-one days, such as commercial papers, treasury bills, and certificates of deposit. Even though liquid funds are preferable for short-term investments, you should consider your goals and risk tolerance before committing to anything. Investors may satisfy their short-term investing demands by investing in liquid funds. The goal of this plan is to give investors more liquidity, less risk, and a consistent income while protecting their cash.

Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.