What Are Liquid Funds?

In FY23, liquid mutual funds accounted for approximately 60% of the inflow, indicating that they were a popular investment choice. Classified as debt funds, they primarily invest in money-market instruments such as treasury bills, commercial papers, etc. 

Liquid mutual funds have a maturity timeline varying from 1 day to up to 91 days, with the Net Asset Value (NAV) being computed for 365 days. The main objective of this investment tool is to provide adequate capital protection, while being highly liquid.

While they have a comparatively low investment horizon, liquid debt funds are considered safe among different types of mutual funds. These funds are ideal for investors who wish to park their idle, surplus funds.

Before you choose liquid funds to invest in, it’s important to understand their features and benefits.

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Features of Liquid Mutual Funds

Besides the low maturity timeline, here are some other features of liquid debt funds.

  • Open-ended debt fund

  • Invests predominantly in short-term debt instruments 

  • Highly liquid with low-risk level 

  • Ease to exit most schemes without incurring penalties 

  • Option to exit after the completion of 7 days 

  • Returns averaging to 6% in a year

  • Low annual charges 

  • Benefit of lower interest rate risk owing to short maturity term 

  • Flexibility to choose dividend payout plan based on requirements, such as weekly, monthly or daily plans

Benefits of Investing in Liquid Mutual Funds

The many features of liquid mutual funds make it a beneficial instrument for investors. For a clearer picture of the upsides, take a look at these pointers.  


1. No Lock-in Period


This allows for easy redemption of units. You have the option of redeeming your funds at any time and your request for redemption may be approved within a day. 


Some liquid funds also provide the option of instant fund withdrawal. However, you need to verify this benefit with the fund manager to know the nuances of fund withdrawal. Most funds do not levy exit load if you redeem the units 7 days after the allotment date.


2. Higher Liquidity


Since these funds have a shorter investment horizon and no lock-in period, you may exit the scheme based on your requirements. This helps you withdraw the funds when you face an emergency. This is one of the reasons why liquid funds are a great choice for parking your idle surplus.


3. Lower Level of Risk


Liquid debt funds are considered a safer investment option compared to other mutual fund types. This is because these funds invest the corpus in securities that have good credit ratings. Also, the 91-day maturity tenure of liquid funds helps you redeem the units and exit the scheme whenever you foresee any risk. 


4. Lower Cost


Yet another benefit of liquid funds is that they typically possess a lower expense ratio. The expense ratio pertains to various costs involved in managing and running a mutual fund scheme. These funds are not actively managed like other fund types, as the corpus is invested in high-rated securities.

Key Parameters to Consider When Investing in Liquid Mutual Funds

Here are some essential points to consider when planning to invest in these funds.


1. Associated Risks


Liquid funds typically invest in instruments with shorter maturity terms such as 91 days. This results in relatively lower volatility. Consequently, the NAV remains relatively stable, making them a low-risk investment option. 


One crucial point to note is that, if the credit rating of the underlying securities drops, the NAV of your liquid fund will be impacted. 


2. Returns on Investment


With liquid debt funds, you typically get a return on investment of around 6% over a year. On the contrary, parking your funds in a savings account will only provide you an average of 4% as interest. 


Since liquid fund returns are on the higher side, investing in them can be a smart choice if your priority is returns and liquidity.


3. Expense Ratio


Similar to other mutual fund schemes, you need to pay an annual fee towards fund management services, known as the expense ratio. If you are planning to invest in liquid funds, looking for a mutual fund with a lower expense ratio is ideal. 


This helps you maximise your returns and accumulate corpus within a shorter timeline.


4. Investment Strategy


Liquid debt funds are generally intended for short-term strategies that aim to generate adequate returns, while maintaining liquidity all through. So, if you plan to invest in liquid debt funds, your investment horizon can’t exceed the 91-day window. 


Moreover, these funds are low-risk in nature, and do not have the potential to generate significant returns. As such, these funds may not be the most efficient choice for investors that have a higher risk appetite. 

Now that you know what are liquid funds, their features, and benefits, you can easily make a choice from various types of funds. With features like high liquidity and no lock-in period, liquid mutual funds could be a great investment avenue for you. Through Bajaj Markets, you can begin your investment journey seamlessly from the convenience of your home.

FAQs on What Are Liquid Funds

Are liquid funds risky?

Liquid mutual funds are considered a safe investment avenue since the investment horizon is short. However, every mutual fund investment comes with some market risks. It’s recommended to do your due diligence prior to investing in any new investment tool.

Is there a lock-in period for liquid funds?

Do I have to pay an exit load in liquid funds?

Who should invest in liquid mutual funds?


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