Liquid funds: Advantages and factors to consider before investing in them

In the world of investment, where stability and flexibility typically flow in different directions, a unique financial instrument emerges, seeking to strike a balance between the two. Enter liquid funds, a diverse and dynamic investment choice that aims to provide a distinct combination of stability and liquidity. In this article, we will discuss liquid funds, which fall under the debt funds category. Let’s check out if liquid funds can be the ideal investment option for you.

What are liquid funds?

Debt funds that invest in fixed-income instruments such as government securities, treasury bills, certificates of deposit, commercial paper and so on with a maturity period of less than 91 days are known as liquid funds. The shorter maturity period means that these debt funds carry the low interest-rate risk as compared to other types of debt funds.
In case of liquid funds, investors can redeem their units at any time with T+1 settlement timeline and plan their liabilities.

Advantages of liquid funds

Now that you know what are liquid funds, you may be wondering if they are suitable for you. Here are three benefits of investing in liquid funds:

• Low interest-rate risk: Limited impact on capital due to change in interest rate is one of the benefits of investing in liquid funds. While they are not entirely risk-free, the shorter maturity period means that your money is minimally susceptible to the change in interest rate.
• High liquidity: The maturity period is relatively shorter for liquid funds as compared to other mutual funds. A shorter maturity period coupled with a quick withdrawal processing makes liquid funds suitable for investing the idle cash in your bank account.
• Better returns: The returns on liquid funds typically tend to be higher than the returns offered by savings bank account. This means that you may invariably make more by investing in mutual funds than by keeping it in your bank account.

Should you invest in liquid funds?

Liquid funds can be a suitable option for you if:

• You are looking for a short-term investment option.
• You have idle cash lying in your bank account.
• You want to earn money without putting your capital at high risk.
• You want to build an emergency fund.
• You are a novice and want to get started with investing in mutual funds.

Key things to consider before investing in liquid mutual funds

Mutual fund investments need to be planned carefully to get the desired returns. Here are the important things you should consider before putting your money in liquid funds:

• Risk level: Yes, liquid funds are relatively stable than many other types of mutual funds, but they are not entirely risk-free. They carry a low level of risk.
• Expected returns: The returns from an investment in liquid funds (thanks to the low risk level and short maturity period) tend to be relatively better than the meagre interest rate offered by banks on savings account. The only thing you need to do is align your liquid mutual fund investment with your investment goals to grow your wealth. Also, unlike savings bank account which have a fixed rate till it is changed, the returns of liquid fund tend to be subject to market risk and changes in interest rates.
• Investment goal: Liquid funds work great for building emergency funds thanks to their low-risk and high-liquidity factor. You can even use liquid funds to temporarily park your funds and then re-direct the returns to a different investment option. Therefore, choose your financial goal and make an investment in liquid funds accordingly.
• Credit quality of underlying securities: Liquid mutual funds invest in short-term debt instruments. You must assess the credit quality of the underlying instruments to evaluate the risk associated with the fund. The higher the credit quality, the lower is the risk of default and vice versa. You can consider seeking the help of a financial advisor in order to make an informed decision regarding your investments.

Liquid funds can be a suitable option for you if you are a risk-averse investor with idle cash parked in the bank account that you want to earn money on in the short term. You can even use liquid funds to transition to equity funds by setting up a systematic transfer plan. The important thing is to align your investment in liquid funds with your investment goals.

Investing in Bajaj Finserv Liquid Fund can help you obtain relatively better returns as compared to a traditional savings account. Also, since liquid funds invest predominantly in highly rated money market instruments, they are a relatively stable investment option. Lastly, you can redeem your units of Bajaj Finserv Liquid Fund at any time with T+1 settlement timeline and plan your liabilities.

FAQs:

Are liquid funds suitable for short term goals?

Yes, liquid funds can prove to be a suitable option for short-term goals. The primary benefit of investing in liquid funds is high liquidity, allowing investors to withdraw their investments within a short duration.

Do liquid funds come with a lock-in period?

Liquid funds do not come with a lock-in period, and you can redeem your investment whenever needed.

Is it possible to start a Systematic Investment Plan (SIP) in liquid funds?

Yes. You can start an SIP in a liquid fund. This can help you become financially disciplined and take you a step closer to your investment objectives.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.