Debt funds are classified into more than fifteen different categories. Of these categories, liquid funds are known for their low-risk nature and for offering high liquidity. Liquid mutual funds offer investors a convenient way to park surplus cash for short periods while generating better returns than traditional savings accounts.
This article shall detail the benefits of investing in liquid funds and elaborate on their functions. Read to know the category of investors best suited to invest in liquid mutual funds.
What makes investing in liquid funds a good idea?
Liquid funds are debt mutual funds that primarily invest in short-term, fixed-income instruments like treasury bills, certificates of deposit, commercial paper, and other money market instruments. These funds have a maturity period of up to ninety-one days, which means that the underlying securities in the portfolio have a maximum tenure of ninety-one days. The short duration of these instruments ensures that liquid funds have minimal interest rate risk, making them suitable for conservative investors.
- Liquid funds operate primarily to preserve the capital while generating steady returns. They focus on high-quality, short-term debt instruments with low credit risk to ensure safety. The short maturity period allows fund managers to efficiently manage interest rate fluctuations, reducing the risk associated with longer-term debt funds.
- Liquid funds offer an instant redemption facility that enhances the liquidity of the investment, making it a preferred choice for investors who may require access to their funds at short notice.
Additionally, liquid funds offer higher returns than traditional savings accounts. Should you invest in liquid mutual funds?
If you belong to any of the following categories, you must invest in liquid funds:
1. Corporates and Businesses: Liquid funds are ideal for corporations and businesses that accumulate surplus funds regularly. The easy access to funds without any lock-in period makes it convenient for business entities to manage their working capital efficiently.
2. Individual investors who wish to build an emergency fund: Emergency funds cover unexpected expenses such as medical emergencies, job loss, or urgent repairs. Keeping the emergency fund in a liquid fund ensures the easy accessibility of capital.
3. Investors who want to invest for the short term: If you have short-term financial goals, such as planning a vacation, purchasing gadgets, or down payment for a vehicle, liquid funds can help you grow your money while providing liquidity.
Remember that liquid funds are not completely devoid of risk. You must conduct an overall risk assessment of your investment profile before investing in a liquid mutual fund. Additionally, you must select a liquid fund with a lower expense ratio – the fee charged by a mutual fund to manage your investments – to save more in the long run.
