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With investing in Liquid funds, the aim should be to invest systematically over a long period of time. Investments in equities should be made to meet your long-term financial goals.
Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in very short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity. Redemption requests in these Liquid funds are processed within one working day.
However, it is extremely important for investors to choose a liquid fund that aims to mitigate the issue of credit risks (risk of default) and liquidity risks (unable to liquidate/sell the assets to meet redemptions) by investing in safer and more liquid instruments.
Risks: Since the underlying assets of a liquid fund have a maturity of up to 91 days, they do not experience a lot of volatility. Hence, the NAV of the fund remains almost steady. This makes liquid funds low-risk investments. However, it is important to note that if the credit rating of any underlying security drops, then the NAV can experience a drop too. Liquid funds are NOT risk-free.
Returns: A quick look at the performance of liquid funds will tell you that these funds offer around 7-9% returns on an average. Hence, they are better than the 4% returns earned on savings account deposits.
Expense Ratio: Like all other mutual fund schemes, liquid funds also charge an annual fee for offering fund management services. This is called expense ratio – a percentage of the total assets of the fund. Funds with a lower expense ratio are preferred by most debt investors as it helps in maximizing their gains. Further, most fund managers of liquid funds invest and hold the security until maturity. Therefore, the fund does not incur expenses due to excessive buying and selling of securities keeping the expense ratio low.
Investment Plan: Liquid funds are used by many investors to create an emergency fund. They offer reasonable returns at lower risks and are as liquid as savings account deposits. These funds are designed for investors with a 3-month investment horizon. Hence, before investing in these funds, ensure that you create an investment plan accordingly.Start Online Quote
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There is a potential to earn higher income by parking funds in a liquid fund vis a vis a savings bank account or current account These funds offer you the flexibility of investment options like growth and dividend payout with weekly or monthly frequencies. You can also transfer this money, to equity funds as and when you feel the valuations are right.
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