Do you want to know what is liquid fund or what is liquid fund investment? Liquid mutual funds are essentially funds that invest their corpus majorly in money market securities such as commercial papers and certificates of deposit.
These funds are characteristically known for their lower risks and ease of liquidity, offering relatively more stable returns compared to other debt investments. In this article, we will look at the key features and benefits of liquid funds in India. Without any further ado, let us get started.
What is Liquid Fund?
Starting with what is liquid fund, it is a type of debt mutual fund for investing in very liquid short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit.
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Put simply, liquid funds park their investments in liquid stocks and assets. You might be wondering exactly what are liquid assets. Liquid assets have a maturity period between fifteen days and ninety-one days. Because they possess liquidity features, these assets are easily encashable.
High liquidity levels in these funds are usually inherently guaranteed due to the nature of their design.
The whole concept of mutual funds is based on pooling of funds. It is like a pooled account of several thousand investors. As far as pool account meaning goes, it means the amalgamation of savings and investments of multiple investors into a single account. Given the track record, liquid funds indeed offer the pooled ride that you shouldn’t miss.
Features of Liquid Funds
Some of the important features of liquid funds are:
1. Stability of Returns
Liquid funds have relatively lower tenures or durations of maturity. Liquid fund returns are usually more stable than those of other debt funds. Purchasing the right liquid fund (preferably having a rating of AAA and not less than AA) can be your ticket to stable returns for a sustained duration of time.
2. High Liquidity
Most liquid funds in India have a maturity period of ninety-one days. Upon submitting a request to redeem your fund units, most fund houses release the proceeds of redemption within one working (T+1) day.
Quite clearly, investing in liquid funds can be the right investment avenue for ensuring timely liquid cash for future requirements. As far as liquid cash meaning goes, it is the cash available for use in hand.
3. Short-Term Investing Avenue
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Liquid funds offer an ideal short-term investment avenue for parking surplus funds that you might require again within 1 day to 3 months. They can help you prevent your funds from staying idle (uninvested).
4. Relatively Lower Risks
Two main risks endanger mutual fund investments: credit risk and interest rate risk. To address credit risk, liquid fund houses invest in short-term debt and money market instruments with high credit ratings.
With interest rates usually remaining stable in the short to medium term, the low time frame of these investments minimises the risk of interest rate fluctuations. Overall, investing in liquid funds saves investors from credit and interest rates but are not completely risk-free.
Balancing Risks and Returns
Liquid funds stand as one of the most riskless investment options available, but they, too come with their own set of risks that every investor should be aware of.
1. Interest Rate Risks
Changes in interest rates can affect the net asset value (NAV) of your existing holdings. Interest rate changes could also lead to unexpected changes in your returns. However, with the right funds, there is no requirement to worry excessively. Thanks to the relatively short maturity duration of the underlying holdings in such funds, interest rate risks are usually quite low.
2. Credit Risks
Some fund houses sometimes select financial instruments that have lower ratings but promise high returns. Any default whatsoever in such cases can impact your fund’s NAV. There is an easy solution to balance this risk.
You should select fund houses that comply with the regulations and guidelines of SEBI. If you want to go a step further, check their investment portfolio (monthly releases) to make sure that these funds invest only in financial instruments with high credit ratings.
3. Liquidity Risks
Liquid funds come with an easy redemption process. This usually completes within one working (T+1) business days after initiating the redemption request. Most mutual funds houses allow online applications for redemption. The only time you can face some delays is during public holidays and long weekends offs. In all, the risk of your investments being unavailable during requirement is minimal in liquid funds.
In summary, selecting funds with high credit ratings is the right way to balance risks and returns concerning liquid funds.
Top 5 Liquid Funds In India (Best Liquid Funds India)
The information on the best liquid funds mentioned below as of 9th September 2024:
- HDFC Liquid Fund (Growth): This fund has over ₹62,000 crore worth of assets under management and has delivered healthy annualised returns of 6.82 % since inception.
- ICICI Prudential Liquid Fund (Growth): With assets over ₹50,000 crores, it is one of the largest liquid funds in India. Since its inception, this fund has delivered annualised returns of 7.13 %.
- Aditya Birla Sun Life Liquid Fund (Growth): With assets over ₹51,000 crores, this fund has outperformed its benchmark index since its launch over 15 years ago. It has delivered 6.98% annualised returns since inception.
- Nippon India Liquid Fund (Growth): With over ₹32,000 crores worth of assets in its kitty, it has given 6.86% annualised returns since inception.
- Kotak Liquid Fund (Growth): This fund manages assets exceeding ₹37,000 crores. It has delivered 6.87% annualised returns since inception.
Who Should Invest in Liquid Funds in India
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Let us look at the investor profiles of those who could invest in liquid funds.
1. Individuals Having Temporary Surplus Funds
These funds are especially suitable for parking surplus money lying idle in your savings account. Investing in liquid ways is a great way to make your money grow in the short term. Their easy redemption ensures you are not short of funds wherever such a requirement arises.
2. Retirees and Senior Citizens
Liquid funds offer a reliable way to earn stable earnings for retirees and senior citizens requiring regular income. Specifically, the funds offering systematic withdrawal plans allow flexible payouts that cater to such investors’ financial goals. Pensioners among senior citizens can supplement their existing pension with the earnings of these funds without worrying about market volatility.
3. Traders
If you are an active trader trading in the share market, not wanting to keep your surplus trading capital idle between significant trades, you can park your money in liquid funds to earn returns on this money. Importantly, you can withdraw this capital in a timely manner whenever any good trading opportunity arises.
4. Businesses
Businesses often have temporary cash surpluses while managing their working capital requirements. Investing this surplus cash in liquid funds opens the doors to better returns than keeping it in the bank accounts. Most importantly, they can withdraw the money as and when the need arises.
In summary, liquid funds suit various individual and institutional investors who prefer a low-risk and high-liquidity financial instrument for managing temporary investing requirements.
Conclusion
With the number of unique mutual fund investors, the mutual fund industry in India has seen a boom in the true sense. One important category of mutual funds is liquid funds. These funds offer promising investment avenues for investors preferring low risks and stability of returns.
They open up opportunities to earn better returns than traditional savings accounts. Last but not least, apart from all the theories, your decision to invest in a liquid fund should align with your risk appetite and near-term cash requirements.
FAQs
What are liquid funds?
Liquid funds are a type of mutual fund that invests in very short-term instruments like treasury bills, commercial paper, and certificates of deposit, which have a maturity of up to 91 days. This makes them low-risk and allows easy liquidity.
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- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
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What returns do liquid funds provide?
Liquid funds generally provide modest returns of 3-6% per annum. The returns are not very high, but the advantage is that your money remains slightly safe, and you can withdraw it anytime.
Is there any lock-in period for liquid funds?
No, liquid funds do not have any lock-in or commitment period. You can redeem your investment anytime you want without paying any charges. This makes them ideal for parking funds for short durations.
Who should invest in liquid funds?
Liquid funds suit investors with a few weeks or months’ investment horizon. They allow retail and institutional investors to park funds temporarily.
References:
https://www.smallcase.com/learn/liquid-funds/#:~:text=Liquid%20funds%20generally%20invest%20in,risk%2C%20short%2Dterm%20assets.
https://groww.in/mutual-funds/debt-funds/liquid-funds
https://www.maxlifeinsurance.com/blog/investments/what-are-liquid-funds
https://www.etmoney.com/learn/mutual-funds/liquid-mutual-funds/
