Understanding liquidity and redemption process in liquid funds

Due to rising financial awareness, many individuals are interested in investing in mutual funds. However, they are hesitant because they feel that the mutual fund investment and redemption process is complicated. But believe it or not, liquid funds are now almost as easy to invest in and redeem as operating a savings account. For most investors, the short investment horizon, low-to-moderate risk level and low entry barrier make liquid funds more desirable than many other mutual fund products.

Let’s first look at what are liquid funds and who should invest in them, before we tell you how to invest and redeem them.

• Table of contents:

1. What are liquid funds?
2. Mutual fund redemption process
3. How to redeem liquid funds?
4. Key points to remember when redeeming equity funds
5. Other strategies to manage your equity portfolio
6. Key features of liquid funds
7. Why should you invest in Bajaj Finserv Liquid Fund?
8. How to invest in liquid funds with Bajaj Finserv AMC?

What are liquid funds?

Liquid funds are open-ended mutual fund schemes that invest in debt and money market instruments with a maturity period of up to 91 days. They are characterized by low risk and high liquidity. Many investors prefer liquid funds over parking surplus money in bank accounts since liquid funds typically offer potentially better returns than bank interest rates. However, unlike savings accounts, the returns from liquid funds are not fixed and are impacted by market volatility.

Mutual fund redemption process

Equity fund redemption refers to the process of converting your units in equity funds into cash. To start the redemption process, an investor submits a request to the fund house. This can usually be done online through the fund's website or through a financial advisor. Once the request is processed, the value of the units based on NAV at the time of redemption is transferred to your bank account. The time taken to complete this process varies but typically takes a few business days.

How to redeem liquid funds?

You need to put in a redemption request with your Asset Management Company (AMC) to redeem your money invested in liquid funds.

As per Securities and Exchange Board of India (SEBI) regulations, the liquid scheme offers instant-redemption facility, investors can instantly redeem up to Rs. 50,000 or 90% of the investment amount from liquid funds, whichever is lower, per day. The amount is transferred instantly via the IMPS facility into the linked bank account. For other withdrawal amounts, the redemption request is processed within one to two business days.

If the redemption request is placed before the cut-off time, then the closing NAV of the same business day is considered (From Monday to Thursday). Whereas, if the redemption request is placed before the cut-off time on a Friday, then the closing NAV of Sunday is taken into consideration.

Similarly, If the redemption request is placed on any day between Monday and Thursday before the cut-off time, and there’s a public holiday on the following day of placing the request, the NAV of the holiday is considered for calculation and the payout is done on the next business day.

In case the redemption request is placed after the cut-off time, then the closing NAV of the next business day is considered for calculation.

Key points to remember when redeeming equity funds

Don’t withdraw in panic: Don’t redeem units or exit from a fund solely because the market is in a downturn. Equity markets tend to be volatile in the short term but have historically stabilised and grown over long horizons. So, if your financial objectives are several years away, you might tolerate short-term market volatility better than someone nearing their financial milestone.

Give your investments time: The compounding effect on your investments gives them the potential to grow over time. This is especially so with equity because it is more susceptible to market volatility. So, if the return on your investment is below your expectations in the first year and your investment horizon is several years, do not rush to exit. Instead, compare your fund’s performance to its benchmark and other funds in the same category. If your fund is consistently underperforming relative to these, you may want to examine if the fund manager’s strategy is the problem. In such an event, you may seek to switch to a different scheme in the same category.

Don’t withdraw on impulse: For disciplined investing, it is important to form and stick to a goal. Create a separate corpus for emergency funds or unforeseen expenses so that you can avoid dipping into your long-term investments when a financial requirement crops up.

Check tax implications: Be aware of the tax liability that comes with redeeming equity funds, as gains for most schemes are taxable. Long-term capital gains may attract lower tax rates compared to short-term gains, so consider the holding period of your investment to potentially reduce tax liabilities.

Check exit load: Check if there are any penalties for early redemption of equity funds, as some funds charge an exit fee if redeemed before a specific period. This fee can significantly impact your returns, especially if you withdraw funds soon after investment.

Check the NAV at the time of redemption: When you redeem your units, the amount you get will depend on the Net Asset Value or NAV. If you request successfully goes through before 3 pm on a business day, your NAV for that day will be used for calculating your returns. If not, the next day’s NAV will be used. The NAV can fluctuate from one day to the next.

Other strategies to manage your equity portfolio

Assess performance: Regularly review the performance of the equity funds to decide if they meet your expectations. Continuous monitoring helps identify underperforming funds early, allowing you to switch strategies or reallocate resources to optimise returns.

Diversify: Reduce risks by spreading investments across various types of equity funds. For instance, a small cap portfolio with high growth potential but high volatility can be supplement by a large cap fund and debt investments for relative stability. Diversification minimises the impact of poor performance in one area by balancing it with stronger returns in another, providing a more stable overall portfolio performance.

Consult an expert: Seeking advice from a financial advisor can provide insights into when to invest in equity funds and when to exit. Other strategies to manage your equity portfolio.

Key features of liquid funds

High liquidity: As the name suggests, liquid funds offer high liquidity, which is critical for investors who need quick access to their funds. In most cases, investors can withdraw their money within 24 hours on business days, making liquid funds a suitable option for parking surplus cash that might be needed at short notice. This feature of instant liquidity makes liquid funds an attractive alternative to savings accounts for managing emergency funds or short-term financial goals. Liquid funds also offer the instant redemption facility, in which, up to Rs. 50,000 or 90% of the invested amount can be redeemed instantly.

Low/Low to moderate risk: One of the most significant advantages of liquid funds is their low/low to moderate risk profile. Since these funds invest in instruments with short maturity periods, typically not exceeding 91 days, they are less susceptible to interest rate volatility. The short duration helps in mitigating the risk associated with changes in market interest rates, which can significantly impact the price of longer-duration bonds. Therefore, liquid funds are considered a relatively stable investment compared to other debt funds that invest in longer-maturity securities.

Relatively stable returns: While returns from liquid funds are not guaranteed, they are generally more stable and predictable compared to the returns on other market-linked investments like equity funds. Because these instruments are short-term with a fixed interest rate, the returns tend to be less volatile. However, it is important to note that the returns from liquid funds, though relatively stable, are usually lower than those from long-term debt funds or equity investments.

Diversification: Liquid funds invest in a diversified portfolio of high-quality debt instruments. This diversification helps in spreading the risk across various securities, further reducing the overall risk of the fund. It is an effective way for investors to gain exposure to different money market instruments with a single investment.

Suitability: Liquid funds are particularly suitable for investors looking to park their surplus funds for short periods. They can be an ideal choice for conservative investors who prefer limited impact on capital invested and liquidity over relatively higher returns. They are also suitable for corporate and institutional investors for managing their working capital requirements.

The standout feature of liquid funds is their instant liquidity. This means investors can access their funds almost immediately, often within a day, which is a significant advantage, especially in emergency situations. This quick access to cash without significant loss in value is what sets liquid funds apart in the mutual fund universe.

Why should you invest in Bajaj Finserv Liquid Fund?

Bajaj Finserv Liquid Fund can provide potentially better returns than traditional products by investing in the money market and debt instruments with a maturity period of up to 91 days. These liquid funds offer a low-to-moderate risk and high-liquidity investment option to investors to help them earn relatively better returns. You can invest in Bajaj Finserv Liquid Fund online with as little as Rs. 1000 and in multiples of Re 1 thereafter. However, the return from the fund is not fixed and is subject to market risk as compared with a Savings account where returns tend to be fixed in nature till it is changed. It is always advisable to consult a financial expert before making any investment decisions.

How to invest in liquid funds with Bajaj Finserv AMC?

You can invest in liquid funds either through a distributor or by visiting the official website. Follow these steps if you want to invest in Bajaj Finserv Liquid Fund online:

Step 1: Visit the Bajaj Finserv AMC website and navigate to ‘Liquid Fund’ in the ‘Products’ dropdown.

Step 2: Select the applicable button for the compliance declaration.

Step 3: Enter your PAN and sign-up with your mobile number and email.

Step 4: Choose your investment amount and horizon.

Step 5: Furnish the KYC details.

Step 6: Complete the payment.

Conclusion

In conclusion, liquid funds are a combination of ‘low risk/low to moderate risk-high liquidity’ investment options that offer relatively better returns than savings bank accounts, at a higher risk than savings account. A liquid fund is also an appropriate way to create an emergency fund, save for a vacation or build a corpus for a larger investment. Anyone new to mutual funds can get started with liquid funds and slowly transition into the more desirable but usually volatile equity funds. You can also use an SIP calculator online to estimate your returns from systematic investments, which will help you plan your financial goals more effectively. You can easily access your money invested in liquid funds because of insta-redemption regulations. To enhance your financial planning, consider using a compound calculator to estimate the potential growth of your investments over time. For wealth creation over the long term, also consider investing in other mutual fund categories. A lumpsum mutual fund calculator can help you estimate the potential returns of lumpsum investments in different types of investment avenues based on your invested amount, tenure and expected returns.

FAQs

What is a fund's liquidity?

A fund's liquidity may be defined as how quickly an asset can be turned into cash. Highly liquid, liquid money can be redeemed instantly with the help of insta-redemption facility.

What benefits may you expect from investing in liquid funds?

Investing in liquid funds has several benefits, including high liquidity, relatively low risk/low to moderate risk, and a speedy redemption procedure.

How do I pick a reliable liquid fund?

You should take into account aspects like expense ratio and the fund manager's expertise when selecting a good liquid fund.

Why invest in liquid funds?

Investing in liquid funds is ideal for those seeking quick access to their funds with minimal risk and relatively stable returns.

What is the liquid fund advantage in getting cash?

The main advantage is the ability to quickly withdraw your investment, providing instant liquidity in times of need.

How does a liquid fund help with cash emergencies?

Liquid funds provide an efficient way to access cash almost immediately, ensuring funds are available during emergencies without the typical penalties or delays of other investment options. However, there is an exit load applicable for investment in liquid fund.

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.