What are liquid mutual funds
The equity markets are volatile in nature and the market movements are dynamic. While every investor wants to earn the maximum returns and tries to time the market, this is simply impossible.
If you are a seasoned investor you tend to predict a market correction or an upswing in the future. However, if you are an amateur you might rely on the forecasts made by many of the so-called experts on the news channels. While a market upswing wants you to invest more in equities, how do you deal with a market when it is corrects or is over-valued? Do you know where to park your investible surpluses at these times or park your booked profits?
A liquid mutual fund is the answer.
What is a liquid mutual fund?
A liquid fund is a debt mutual fund scheme which invests primarily in short-term Government treasury bills, call money and Government securities (G-Sec) etc. The underlying assets of a liquid mutual fund have a maximum maturity period of 91 days. Thus, liquid mutual funds are used for short-term investment options.
If you have surplus amount lying “idle” in your savings bank account, you should question yourself about the opportunity cost of keeping it in savings bank account. People do not have sufficient time to think about how to invest this surplus money; consequently, large sums of money accumulate in savings bank account and remain idle (unproductive) before investors figure out a use for them. Liquid funds are excellent investment options for investors who have money parked unproductively in their savings bank accounts.
How liquid funds work?
Liquid funds offer a high degree of safety and liquidity. It is very rare for liquid fund NAV to fall in value; therefore, the risk of capital loss is very minimal. Redemptions from liquid funds are processed within 24 hours on business days (Transaction + 1 day). Some liquid fund schemes even offer instant redemption, if the transaction is made through the AMC website or mobile application.
There is no entry or exit load for liquid funds; it means that, you can redeem your investments, partially or fully at any point of time, depending upon your cash flow needs. Liquid mutual funds usually give higher returns over savings bank account interest. Also, no tax is deducted at source on gains made on liquid fund investments for resident Indian investors.
Liquid funds are flexible investment option
Liquid funds can be very useful for Systematic Transfer Pan (STP) investments. STPs are used when investors have sufficient lump sum funds to invest in equity mutual funds but do not do so as the markets may be at higher point or they want to take advantage of “rupee cost averaging” from volatile markets. To start a STP, investors can park the lump sum investment in liquid funds and transfer through STP to equity funds of their choice at a frequency which can be daily, weekly, fortnightly or monthly. Investors would earn returns from their lump sum (diminishing albeit) investment in liquid funds and at the same time, take advantage of “Rupee Cost Averaging” by investing in equity funds systematically.
How liquid funds help in a market crash?
The inherent nature of the liquid fund helps investors as it act likes a financial cushion when markets corrects. In times of market crash or when you want to book profit you can switch your investments to liquid funds. Liquid funds give you a better return compared to savings bank account. Moreover, they also provide easy liquidity. When the market recovers after the crash, you can instantly withdraw your investments from liquid funds and reinvest them again in equities/ equity mutual funds. There is no exit load charged and money is available on T+1 basis, i.e. transaction + 1 day. Thus, liquid funds act as the ideal parking place for your funds at the time of market correction.
Earns better return over saving bank account
Liquid funds can help investors make their idle money work instead of keeping them in savings bank accounts. You can park your investible surpluses even for a few days or few weeks or few months. If investors have large sums of idle money lying in bank account, even a small percentage difference in yields can have a fairly significant impact on the total gains.
For example – Liquid funds gave between 6 – 8% return in the last one year which is quite high compared to the savings bank return of 3.5 – 4%.
Liquid mutual fund is the best investment option for the money that investors may need to use at a very short notice or the money that they are not sure when they will need for meeting various purposes.
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