Keep some liquidity, but in the right investment
Liquid funds are a great option for individuals who otherwise prefer to keep their money in the bank for the sake of safety and liquidity.
As we live in times of uncertainty, investors are concerned about keeping adequate liquidity. It’s true that in times of crisis, one needs to invest wisely and have enough liquidity to tide over emergencies. But that does not mean you keep all your funds in cash or in bank savings. While cash does not have any returns, savings bank deposits carry a very low interest. So, a better alternative to keep liquidity would be to invest in an instrument that provides the best of both worlds, i.e. higher earnings and safety of your capital.
Understanding liquid funds
Liquid funds are debt funds that offer safety to your capital with easy liquidity and reasonable returns. Liquid funds invest in highly liquid money market instruments and debt securities of very short tenure and hence, provide high liquidity to the fund. The average term of the investments made by such funds is around three months. Most importantly, just like you are free to withdraw funds from your savings account, you can withdraw your investment from liquid funds at any time you choose. There’s no usually no charge or exit load for redeeming your investments in liquid funds.
Benefits of investing in a liquid fund
Higher returns: Most liquid funds generate post-tax returns that are higher than the rates offered by bank deposits or savings accounts.
Low risk: Liquid funds are a low-risk instrument. The aim of the fund manager of a liquid fund is to invest only in short maturity investments with good credit rating and very low possibility of a default.
Low cost: A fee called the expense ratio is charged for managing your investment. SEBI has put an upper cap of 1.05% for fees for such funds. Thus, liquid funds are low-cost funds considering the higher returns in the short term.
High liquidity: Liquid funds typically do not charge any exit loads. Redemption payment is made within one working day of placing the redemption request.
Who should invest in liquid funds?
Liquid funds are a great option for individuals who otherwise prefer to keep their money in the bank for the sake of safety and liquidity. They are also ideal for those who have idle funds for the short term. Liquid funds are also a convenient investment option to park lump sum money and deploy it gradually in equity mutual funds through the Systematic Transfer Plan. In times as these, where the equity market is battered by an ongoing pandemic crisis, risk-averse investors will find liquid funds as a good option to earn low-risk returns that can be easily redeemed for emergencies.
Selecting a liquid fund
Well, not all liquid funds are created equally. Also, liquid funds do not come with zero risks. Therefore, you need to select a liquid fund wisely. Ideally, compare liquid funds and opt for one with a large corpus. Also, try to avoid funds that invest in concentrated portfolios. The safety of the principal is much more important than the returns.
So, be responsible with your money. Go for a good liquid fund, rather than letting money sit idle. Stay invested, stay safe!