Liquid funds are mutual funds that engage in securities that have a latent expiration of up to 91 days. Because liquid fund do not have a lock-in duration, capital contributed is not locked up for an extended length of duration.Â
Liquid funds are a type of debt fund that invests in money market securities that provide short-term fixed income. Treasury bills, commercial paper, and other fundamental securities are types of underlying assets in a liquid fund’s holdings.
The goal of Liquid Funds
The primary goal of liquid funds is to offer shareholders a high level of liquidity and capital security. As a result, the portfolio manager participates in high-yielding debt products with maturities as short as 91 days. The allocations are assigned in accordance with the fund’s investing goal.
The fund management will guarantee that the portfolio’s aggregate tenure is three months. This lessens the volatility of fund returns to changes in interest rates and makes liquid fund less unstable.
The fund’s value does not fluctuate much. Furthermore, the maturity of the underlying assets is aligned with the portfolio’s maturity. It contributes to better returns. Liquid funds are a wonderful way to invest your spare cash.
These are minimal risk investments with better returns than a traditional savings account. Liquid fund attempt to replicate the liquidity of a savings bank account. There is no lock-in period for such funds. You can generate larger profits by using liquid money like a normal savings account.
Points to Remember While Investing in Liquid Funds
Expense
The cost ratio is a minor fee charged by liquid funds to manage your investment. The top limit of the cost ratio has been set by SEBI at 1.05 percent. Given the investment manager’s preserve till maturation policy, liquid fund keep a low cost ratio in order to provide comparably larger profits in the short term.
Earnings
Typically, liquid funds have made earnings in the region of 7% to 9%. It is far superior to the meager 4% earnings produced by a savings account. Although the earnings on liquid funds are not assured, they have frequently given good returns upon liquidation.
Risk
Liquid funds are not without risks and investors must keep that in mind before investing. You must consider the factors affecting its volatility and then only commit to investing.
Prospect
Liquid fund are suitable for investing surplus capital for a short timeframe, say up to three months. A limited time horizon allows you to realize the maximum value of the underlying funds. If you have a long-term investment goal, say up to a year, you should think about investing in ultra-short-term investments to get larger profits.
Goal
If you wish to start a reserve fund, liquid fund might come in handy. In addition to obtaining better returns, these will allow you to withdraw funds fast in the event of an emergency.
Tax
Capital gains are earned if you participate in liquid funds, and they are taxed. The tax rate is determined by how long you remain involved in a debt fund. The holding period is the length of time you stay engaged.
Also Read: Types Of Mutual Funds In India