The liquidity of a mutual fund is a determining factor because it indicates whether you can redeem your investments during need. Debt funds and their variants usually offer high liquidity. One of the debt mutual fund investment options is liquid funds. These funds are one of the different debt funds available in India.

What are liquid funds?

Liquid mutual funds direct their investments to assets with a maturity of up to 91 days. Liquid funds are considered a safer investment option because of the low maturity period and high liquidity quotient.

Liquid fund investment is towards commercial papers, government securities, treasury bills, and different money market instruments. A short maturity period ensures your funds are accessible and have better capital protection.

What are the features of liquid funds?

Let’s look at the salient features of liquid funds so that you can make the right choice:

• Like bank accounts, liquid funds are redeemable after one day of investing. The redeemed fund will be deposited into your account within a day after submitting your withdrawal request.
• Even a short-term investment can earn you an interest. Liquid funds are ideal if you are looking for a mutual fund variant that offers returns on a short investment period.
• The returns on liquid funds depend on the market performance.
• Liquid funds are not subject to tax deductions, and thus TDS is not applicable.

Tips for investing in liquid funds

You may consider liquid funds as an investment option based on the features above. However, you shouldn’t invest in liquid funds recklessly without thinking. Please follow the tips below:

• Check the expense ratio:

The expense ratio is the annual fee the asset management company charges for managing your liquid fund portfolio. These funds generally have a lower expense ratio because the fund manager holds the security till maturity. Therefore, liquid funds do not come with additional expenses for management. Therefore, AMCs levy a lower service charge.

• Calculate the returns:

Liquid funds have an edge over bank accounts because they offer better returns when compared to bank accounts. However, please remember that the returns on liquid funds rely on the market performance.

• Determine your risk appetite:

Because of the shorter investment period of nearly 91 days, liquid mutual funds are considered low-risk investment options. However, please note that liquid funds are not risk-free. The NAV of liquid funds drops whenever the credit rating of any of the underlying security drops.

• Formulate an investment plan:

Liquid funds help create emergency funds because of their three-month investment horizon. Furthermore, they come with lower risks too. A well-thought-out investment plan can help you make the most out of your liquid fund.

• Compare the risk against returns:

Liquid funds come with a short-term maturity. These funds have a low risk of capital depreciation and interest rate changes as they mature at nearly 91 days. Like other debt fund variants, the returns on liquid funds are market linked. They vary based on prevailing liquidity and the current interest rate. Hence, determine the risks you may encounter by thoroughly studying the market condition.

Conclusion:

Liquid funds are a reliable short-term investment that can fetch you long-term returns. Please follow the investment tips above. Doing so will help you make the most of your liquid fund. If there are any queries, contact a financial expert as soon as possible. Happy investing.