A liquid mutual fund is an open-ended scheme that invests for a limited period of time in the money market and debt instruments such as government securities and bonds and expires after exactly 91 days. Investing in a liquid fund aims to reduce the risk of interest rate volatility. These are often lump-sum investments, although they can also be made through SIPs in liquid funds of one’s choice.
Benefits of Liquid Funds
Liquid funds are perfect for investors looking to put their money in a safe place for a short period of time. The goal of these funds is to deliver larger returns than bank accounts while maintaining a similar degree of security.
- Minimal Risk
A liquid fund is a low-risk debt investment that focuses on preserving capital and producing consistent returns. As a result, the value of a liquid fund is relatively steady throughout numerous market interest rate cycles. Because of 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.
- Quick Redemption
You get the requested redemption amount within a day in a liquid fund, and only a few funds allow rapid redemption. This is conceivable because liquid funds are invested in highly liquid securities with minimal risk of default. You also have more options when it comes to how you invest, grow, and get dividends.
- Alternative Of emergency fund
A liquid mutual fund is extremely useful since it 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, so read the tiny print carefully before investing. On the other hand, the normal liquid fund matures after 91 days. You can invest in your chosen fund through SIPs or as a single sum investment.
- Low cost
Because liquid funds are not actively managed like other debt funds, they are low-cost debt funds. Traditionally, most liquid funds have cost ratios of less than 1%. They can improve the effective return to the investor by using this low-cost structure.
- No lock-in period
There is no lock-in time for liquid money, and they may be removed within 24 hours upon request. The withdrawal window closes at 2 p.m. If a withdrawal request is made after that time, it will be processed by 10 a.m. the next day. There are no entrance or departure loads on liquid funds.
Some Other Benefits
- Liquid funds do not have a lock-in period. Therefore assets are not locked up for a lengthy time.
- Dividends are not subject to taxation. Capital gains, on the other hand, are subject to tax.
- Investing a part of your extra income in liquid funds allows you to pay unexpected costs while also protecting you from the volatility of equities investments.
- The liquid fund’s net asset value (NAV) does not fluctuate as much as other funds’ NAV.
- Unlike other debt funds, liquid funds’ NAV is determined for the entire year rather than just business days.