Liquid Funds: Should you invest in them?
Liquid funds are debt mutual funds that invest your money in very short-term debt instruments such as treasury bills and commercial paper. The maturity of these instruments ranges from 1 day to 91 days typically. These funds are used by investors to park their idle money for short periods of time, usually less than 6 months.
According to the data provided by AMFI (Association of Mutual Funds in India), as of December 2017, an enormous sum of Rs 2.7 lakh crores is invested in liquid funds. This is more than 10% of the assets managed by the mutual fund industry.
So what makes liquid funds so popular?
It can be a good alternative to leaving your money in a savings bank account. Investments in liquid mutual funds can be redeemed anytime and the money will be credited within one business day. There is no exit load on liquid funds. Returns are around 5.5% – 7.5% based on the credit quality of the bonds invested in, duration of the bonds and the interest rate cycle. This is higher than the 3.5% – 4% offered by most banks on their savings account.
They are considered to be the least risky across all categories of mutual funds. Because of the very low maturity of the underlying instruments, there is very little fluctuation in their value. The quality of the securities invested in can be seen from the credit ratings. Liquid funds invest in relatively high quality instruments, where the risk of default in the interest payments is very low, maybe even negligible.
Should you invest in them?
1. A 2% higher return might not seem like a big deal when the money involved is small. But if you are holding a large amount of money to make the down payment for a house or pay for a holiday over the next two months, you could park the money in a liquid fund.
2. Liquid funds would be a great option when you have a sudden influx of cash, like money from an unexpected bonus or the sale of a car maybe. While you decide what you want to do with it, just put it in a liquid fund. Not only will you make a little more than your savings account, you might just save yourself from any temptations to spend the money.
3. If you are a first-time investor who is still trying to figure out if investing is for you, just park a small amount in liquid funds to get some experience and gain some perspective. You can do this with any mutual fund, but with liquid funds, you have the comfort of knowing that it is quite safe and of course, very liquid.
