Liquid Mutual Fund

A Liquid Mutual Fund is a debt fund which invests in fixed-income instruments. Liquid mutual funds invests in securities have a residual maturity up to 91 days. The best part about investing in liquid funds is that they have the lowest interest rate risk in debt funds. Liquid funds are considered to be a better form of investment in comparison to fixed deposits since they offer steady returns. After the maturity period ends the net asset value of the fund is calculated for 365 days. Liquid funds redemption time depends on individual funds. Some funds offer instant redemption for investors.

How do Liquid Mutual Funds work?

In liquid mutual funds, the fund manager looks for debt securities with less than 91 days of average maturity. The goal is to find the best liquid funds with a short maturity period to avoid any change in the liquid fund interest rate.  The reason behind choosing a debt fund with a short maturity period mitigates the risk factor and increases the chances of better returns. Liquid funds are taxable in case the capital gains received by redeeming the units are higher than the purchase price. The cutoff time to redeem liquid funds in India is 3 pm.

Should you invest in Liquid Mutual Funds?

If you are looking for an investment option with lower risk then we would recommend that you consider investing in liquid mutual funds. It is better than keeping your money in the bank. Most investors start with liquid fund investment and then move on to investing in equity funds. Liquid mutual funds work as a stepping stone for investors. Once you are comfortable, you can move onto stocks since there is higher risk involved in equity.

Factors to consider before investing in Liquid Mutual Funds in India

Like any other form of investment, there are some advantages as well as disadvantages to investing in liquid mutual funds. Here is a list of things that you need to keep in mind when investing in liquid funds:

Risk

As mentioned earlier Liquid mutual funds are low-risk investments since they invest in securities have a maturity period up to 91 days. However, there are no guarantees since liquid funds are also linked to the market. Liquid funds mostly invest in AAA-rated papers which makes them quite secure. 

Returns

In comparison to a savings account, liquid fund returns are far much better. This is the reason why they are considered to be a better investment option for those looking for a higher rate of returns. Liquid funds invest in fixed-income instruments like commercial paper, treasury bills and government securities that ensure steady returns.

Expense ratio

Similar to other mutual funds, liquid funds also incur certain charges as maintenance fees known as the expense ratio. Most fund managers look for the best liquid funds to invest with lower expense ratios for better liquid mutual fund returns. However, liquid funds are held up until maturity which reduces the expense ratio for that particular debt fund.  The lowered cost of maintenance also adds to the overall returns making liquid funds a lucrative form of investment for investors looking for  a low-risk investment option.