Liquid funds can be an option for people looking for short-term investments, liquidity and above average returns.
When it comes to saving money, traditional savings options have been the preferred over all others for a long time. Without a doubt, such options are vital for our day to day transactions and to park money. With the advance of technologies and modern applications, they are fairly ubiquitous and convenient to use, providing modest appreciation and security.
Despite the advantages offered by traditional options, it may not be the most efficient way to save money. The main reason would be the modest returns offered.
Liquid mutual funds invest in money market instruments like treasury bills, corporate papers, bank certificate of deposits, etc. These instruments have zero or low risk, offer fixed returns and have a fixed maturity period. Liquid funds invest in instruments with upto a maturity of 91 days. While traditionally institutional investors (corporates and banks) have invested in liquid funds, retail participation is also increasing. As per AMFI data, liquid funds have seen its assets under management grow by 13% since October 2016.
One of the major advantages of investing in liquid funds is the returns, compared to traditional savings options. As per the daily updated data on Moneycontrol, the top-performing mutual funds generate returns ranging between 7.7%-10% annually. Even during an inflationary period, the Reserve Bank of India (RBI) would keep interest rates high, tightening liquidity which may allow liquid funds to post good returns.
However, the real worry with traditional savings is inflation. A rise in inflation would put a dent in the purchasing power and thereby would give lower returns. On the other hand, liquid funds are market-linked, and an extraordinary financial crisis can impact the selling price. The returns from liquid funds are not guaranteed.
Overall, the question is not whether traditional savings instruments are better than liquid funds but how to effectively manage the surplus. Depending on the person’s income, expenditure and risk profile, a savvy investor can save an adequate amount of money for expenses and emergencies while deploying the remainder in a liquid fund and aim to earn better returns on it.