Getting To Know Liquid Mutual Funds Better!

Published by Sharekhan Education | August 5, 2021

Getting To Know Liquid Mutual Funds Better!

Liquid fund is an important asset that serves as a reserve for your emergency money. Along with fixed deposits, saving accounts, gold and cash in hand financial experts’ advice that you park some amount of your emergency money in liquid funds. As a general rule emergency assets should be easily accessible, safe and highly liquid. Fixed deposits, liquid funds, savings bank accounts, gold and cash meet the above criteria and thus qualify as emergency assets. Of the emergency assets listed here fixed deposits, gold, savings bank accounts and cash require little introduction, what remains is liquid funds. It is time to get to know them better.

So what are liquid funds?

Liquid Funds are open ended debt mutual funds. These are low-risk low-return funds that hold a portfolio of good quality and highly liquid papers (treasury bills, government securities, repos, certificates of deposit, or commercial papers) of debt and money market instruments with maturities of up to 91 days.

What do Liquid funds offer?

1. Lower costs: The total expense ratio of these funds is typically less than 1%.

2. Lower risk: As the portfolio of these funds consists of good credit quality short term papers they face lower credit risk /default risk and are less sensitive to interest rate fluctuations.

3. Exit load: There is a small exit load if you exit liquid fund within seven days of investing but nil exit load otherwise.

4. Faster redemption: You can redeem your money in just about one working day from a liquid fund.

5. Better alternatives to bank fixed deposits: As there is no exit load for redemption after 7 days from a liquid fund it serves as a better alternative to bank fixed deposits where your money is locked for a fixed period and generally attracts a penalty on early exit. This is not the case with a liquid fund.

6. Tax efficiency: Liquid funds being debt funds, enjoy the benefits of indexation, making the gains tax efficient in the long term.

7. Avenue for emergency fund: High liquidity and low risk makes it an excellent avenue to park your emergency funds.

8. Temporary parking space for your money: Liquid funds are designed to keep your money safe while earning a small return. Hence, a large sum of money, say, from a bonus, sale of property or inheritance, can be temporarily invested in it until you decide how to invest it further.

9. Platform to invest your surplus money into equity markets: Liquid fund is a useful way to channel your surplus money into equity funds. You can park your money in liquid funds and then systematically transfer it to equity funds via Systematic Transfer Plan.

To conclude:

In a nutshell we can summarize that liquid funds are low cost, low risk, easily accessible and safer instruments. It can be useful to park your money for shorter investment horizon or for your emergency reserves.

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