Liquid Fund is a category of Debt Mutual Funds. Debt Mutual Funds who invest in very short-term market instruments such as treasury bills, government securities, bank certificates of deposits and corporate bills are called as Liquid Funds. Most of these instruments contain either no risk or low risk. Liquid funds are an open-ended fund investing in Money Market Instrument having a maturity of up to 91 days.
Liquid Funds objective is to provide a high degree of liquidity and safety of capital to the investor. Because of this, fund manager invests the capital in the high credit quality debt instruments.
Benefits of Liquid Funds:
- No Lock-in Period
- Withdrawal from Liquid Funds are processed under 24hours on the business day
- Double returns than Saving Account
- No Entry and Exit Load
Returns from the Liquid Funds:
The returns from the liquid funds are double than saving accounts. Usually, the range of returns from the liquid fund is between 6-7%. Investors start earning returns from the date of investment itself thus minimizing any return leakage.
Who should invest in Liquid Funds:
Liquid funds are ideal parking grounds when you have a sudden flood of cash. Instead of keeping it in a savings bank account, you may invest that performance incentive which you received recently or some windfall gains in a liquid fund. You can exit the scheme anytime without any exit load and receive your funds the next day.
Let’s take an example if you sell a plot or house and plan to buy another house within the next 3 months then you get loads of money suddenly into your bank saving account. This temporary money can be invested for the next 3 months in the liquid funds to get more interest than savings accounts.
One more example of Liquid Funds is that you can invest your business funds (rotating funds required for running the business) into Liquid funds. As the business funds are generally kept in the current account where the interest rate is zero, this fund can be invested in the Liquid Funds. As Liquid Funds have high liquidity, you can redeem the funds within 24 Hours.
Another way to use Liquid funds is to invest your lump-sum capital in the Liquid funds and opt for the STP to invest in the Equity Funds of your choice. Generally, you will go for SIP to invest in Equity Funds if you are receiving a monthly income. But if you are getting lump-sum at one go then you can opt for liquid funds for parking the money. In this way, you would save yourself from placing large bets all of a sudden into equity funds and can get the benefit of rupee cost averaging.