What are liquid mutual funds? should you invest in it?

People who invest in the market do so to accumulate wealth over time. Opting to allocate wealth funds into investment plans helps people to earn extra revenue, as sometimes, the income earned from full-time employment may not be enough for sustenance. While investing, one will come across numerous investment tools. One of them is mutual funds. They are investment products that pool money from a group of investors to purchase different securities. Through a mutual fund, you can invest in various financial securities like stocks, bonds, gold and money market instruments through an investment vehicle.

However, one of the important aspects of mutual funds is that they are not a monolith. In fact, there are numerous types of mutual funds that are available in the market. One of them is debt funds.

What are they?

Also known as fixed-income funds, debt funds invest a significant portion of the investor’s money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments. By allocating funds in such avenues, debt mutual funds lower the risk factor considerably for investors. This is a relatively stable investment avenue that could help with wealth generation. However, like mutual funds, even debt funds have their own subcategories. One among them is liquid funds.

How do liquid funds work?

The main intention of liquid funds is to provide a high degree of liquidity and safety of the capital for investors. For this, fund managers usually invest in high-rate debt instruments that mature in just 91 days. The funds are allocated proportionately as per the investment objective. The fund manager will ensure that the average maturity of the portfolio is three months. This reduces the sensitivity of fund returns to interest rate movements and makes liquid funds less vulnerable. Liquid funds try to emulate the liquidity aspect of a savings account. These funds don’t have a lock-in period. You can use liquid funds as a regular savings account and earn higher returns.

What are the benefits of liquid funds?

Listed below are some of the advantages of liquid funds:

  • They come with minimal risks:

Liquid funds are low-risk debt investments that focus on preserving capital and producing consistent returns. Therefore, the net asset value of a liquid fund is relatively steady throughout numerous market interest rate cycles. Thanks to their short investment duration, liquid funds are very liquid in nature, with little interest rate movement. The shorter investment time also eliminates the chance of your money being affected by credit rating swings.

  • They can be redeemed quickly:

When it comes to investment schemes, very few funds allow rapid redemption and in a liquid fund, you get the requested redemption amount within a day. As liquid funds are invested in highly liquid securities with minimal risk of default, this is conceivable. You also have more options when it comes to how you invest, grow, and get dividends.

  • Useful for emergencies:

Liquid mutual funds are extremely useful as they may be used to pay unexpected expenses or to park any excess investment earnings. Different mutual funds have different limits in their plan policy documents. Therefore, while investing in mutual funds, it is of utmost importance to read the rules and regulations carefully before investing. A liquid fund, on the other hand, matures after 91 days. You can invest in the fund of your choosing through SIPs or as a single sum investment.

  • They don’t have lock-in periods:

There is no lock-in time for liquid funds, and they may be removed within 24 hours upon request. Yes, you read it right. It is possible to withdraw money from liquid funds and the redemption amount will be available in one day. Some fund houses also offer instant redemption and debit cards linked to liquid fund facilities. Moreover, there are no entrance or departure loads on liquid funds.

Apart from the four above, there are other benefits like the dividends not being subjected to taxation and their NAVs don’t fluctuate like they do in other funds. In case you are having substantial idle cash and are looking for short-term investment options, you can invest in liquid funds.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.