Imagine you have received a sudden and unexpected windfall, and you want to park those funds for a short period until you zero in on a profitable investment option. In such a case, you would want the money to give you a return without much risk involved.
One of the best places to park the money would be liquid funds. These funds do not have much risk and offer good returns as compared to fixed deposits and savings accounts.
Let’s talk about liquid funds in detail and how you can start investing in them with the help of a financial advisor like FinEdge.
What are Liquid Funds?
Liquid fund is a type of debt-oriented mutual fund that invests in securities with a maturity period of up to 91 days. The assets invested in this type of fund are not tied-up long-term as they do not have a lock-in period.
Liquid funds invest in financial instruments like:
- Treasury Bills
These are short-term instruments used by the government to raise funds from financial markets. These bills have a maturity period of 91, 182, or 364 days.
However, liquid funds invest in the treasury bills that mature after 91 days. These bills are zero-coupon bills, i.e., they do not carry any interest and are redeemed at face value on maturity. For example, a treasury bill can be issued at ₹98 and redeemed at ₹100.
- Commercial Papers
These are defined as unsecured money market instruments that are issued in the form of promissory notes. They have short-term maturity periods and are issued by financial institutions, corporates, and primary dealers. These papers are actively traded in the OTC (over the counter) market.
- Certificates of Deposit
Certificates of Deposit (CDs) are financial assets issued by financial institutions and banks to corporates, individuals, and other entities. It is similar to a fixed deposit – you deposit the money into the bank and get a certificate of deposit.
- Repurchase Agreements
Repurchase agreement or repo refers to a formal agreement between two parties, wherein one party sells a security to the other party, with the promise of purchasing it back at a predetermined time, amount, and interest rate. The interest rate charged by the buyer to consenting to buy the security is known as the repo rate.
Here are some more reasons that will make you want to invest in liquid funds:
Why is it a Worthy Idea to Invest in Liquid Funds?
- Higher Returns
Liquid fund investments offer better returns as compared to fixed deposits or savings accounts, so your idle cash will earn you more money. On average, liquid funds give an average return of 6-8%, while savings accounts generally provide a return of 4%.
- Minimal Capital Risk
Since liquid funds have a maturity of up to 91 days, they do not have a lot of volatility. Thus, the NAV (net asset value) of the fund remains steady, which makes them a low-risk investment option.
- Easy to Accumulate Emergency Funds
Liquid fund investment is one way to increase and maintain an emergency fund. The emergency fund should always be kept separate from your regular deposits. Even though interest might not be a consideration for emergency deposits, there is no harm in earning some of the essential requirements of safety and liquidity is met. You can redeem your money at any point in time, and the amount is deposited into your account within 24 hours.
- Minimal Exit Load
Exit Load is defined as the cost that investors have to bear in case they sell or redeem their funds before a predetermined time-frame.
Initially, liquid funds did not have any exit load. Thus, the investors could redeem their funds even after a day. However, in September 2019, SEBI (Securities Exchange Board of India), made a ruling that investors will be charged a structured exit load if they redeem their units within a week. The structure of the exit load is shown in the table below:
|Holding Period||Exit Load %|
|Day 7 Onwards||0.0000%|
Invest in Liquid Funds with a Financial Advisor
Liquid investment funds are now considered to be an extremely efficient method of liquid cash handling. If the reasons mentioned above have gotten you interested in investing in liquid funds, plan to park your idle cash into liquid funds. If you need assistance in doing the same, you should contact financial advisory firms. They will help you invest your idle savings and provide you with inflation-adjusted maximized returns. Make sure you gain in-depth knowledge of these types of mutual funds before investing in them.