What Are Liquid 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

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.

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.