What Are Liquid Funds And Should You Invest In Them Now?

It’s a good time to look at your investment portfolio as global uncertainty starts wearing off and you make plans for the current year. While debt and equities often get lumped together when it comes to deciding on a winning strategy, the fact of the matter is you need to dig deeper to find what investment strategies work for you and which ones don’t.

Take traditional instrument rates for example. These have been rising due to central banks policies worldwide. While you might be tempted to open these to profit from them over the next few months, there are no guarantees when traditional instrument rates might course correct. How do you safeguard your investments for shorter periods then? The answer is liquid funds. [PM1]

What Are Liquid Funds?

Liquid Funds are debt funds that come with a maturity period of up to 91 days. They invest in fixed-income securities such as commercial papers, certificates of deposits and other securities. These funds come with no lock-in period, meaning you can withdraw your investment at any time.

Because the funds usually take two working days to reflect in your account, liquid funds are used as readily available funds by a certain group of investors.

Pros & Cons

Pros:

1 - In the current market scenario of high inflation, liquid funds tend to outperform as central banks such as Reserve Bank of India maintains a high interest rate to tighten liquidity. This, in turn, boosts liquid mutual funds by increasing their return on investment.

2 – Liquid funds are managed by professionals working in reputed fund houses. However, they carry a very low expense ratio that helps to deliver more money in your hands compared to other types of mutual funds.

3 – Liquid funds may carry less amount of risk as the investment is tied to government securities that have minimal chances of defaulting. Since the holding period is for maximum 91 days, investors can also be assured that no sudden flip flops will occur to hamper their investment.

Cons:

1 – Low returns can be one of the inherent features of liquid funds. While this is fine with most investors as long as their capital is protected, this might not work with investors who are always on the hunt for high returns.

2 – The low returns also mean that liquid funds carry an inflation risk as their rate of return often isn’t on par with inflationary rates. It is therefore suggested that liquid funds only be a part of an individual’s overall portfolio.

3 – Liquid funds are not immune from credit risks despite investing your capital in government securities. To expect that your investment will give you an exact figure of return and that your capital might not give negative returns due to external factors would be a huge folly.

Who Should Invest

Liquid funds are one of the best investment options for those looking to park their money for a short duration and earn some interest income on them. It’s not a complete investment strategy and not for those who seek high returns.

Liquid funds are also in high demand currently, thanks to the global economic trends, making it an opportune time to invest in them. Make sure you choose a fund with experienced fund managers who have been around for a while, have  high amount of assets under management and consistently delivered good returns.

If you haven’t yet invested in them already, the present time might be good to check with your investment adviser about the best liquid mutual funds to invest in.

Disclaimer:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

An investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund. All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link: https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.

 Moneycontrol journalists were not involved in the creation of the article.