Just like a new year that excites everyone to make resolutions, there is a financial year for investors. It’s time for them to overview their investment strategies, look at the returns received, and plan further investments accordingly. If you are new to investing money, you might not know about all investment options available. You may also be facing the constant struggle to deal with various factors like returns, risk or liquidity before investing.
Along with getting good returns on your investments, it is also crucial to consider the liquidity factor. It is where investing in liquid mutual funds is a safe bet. Before you plan to include these funds into your investment portfolio for this financial year, you must know about them in detail.
What Are Liquid Funds?
Liquid mutual funds are open-ended debt fund schemes that invest in fixed-returns instruments, such as securities and treasury bills. These funds are one of the safest options as they mitigate the risk of interest rate volatility. Also, the risk of default is low, which means the money you invest in these funds will stay safe.
A unique characteristic that attracts investors toward liquid mutual funds is their high liquidity and short maturity period. These are highly liquid schemes, and they have a maximum maturity period of 91 days. You can receive the redemption payouts into your bank account in one working day.
How Do Liquid Mutual Funds Work?
Liquid mutual funds provide high liquidity and safety to your capital. To make that happen, the fund managers invest in debt instruments that have high credit quality and ensure that the average maturity of the portfolio is three months. Since the maturity period is short, the fund returns are not very sensitive to the changes in interest rates.
If you have money kept aside in your bank accounts and there is no such urgent need to utilize it, you are advised to invest it in liquid mutual funds. By doing so, you will receive higher returns than keeping the capital in a savings bank account.
Advantages of Investing in Liquid Mutual Funds
- Good Returns During High Inflation
The changing inflation rate has its impact on several aspects of the economy, and investment planning is no different. Liquid mutual funds are one of the best investment instruments available to you during high inflation. With the Reserve Bank of India (RBI) managing the liquidity factor, you can get good returns by investing in these funds.
- No Lock-in Period or Exit Load
Many investment instruments like ELSS have lock-in periods, which means you can’t withdraw your money before the specified period ends. On the other hand, liquid mutual funds have no lock-in period, which means you can withdraw your capital in 24 hours by placing a request for the same.
When you leave a mutual fund scheme before maturity, you need to pay a fee or amount, which is known as exit load. Another reason why you should invest in liquid mutual funds is that there is no exit load.
- Minimum Associated Risk
The duration for which your money stays invested in an investment instrument is known as the holding period. In general, the holding period has an impact on your capital returns and investment risks. Ideally, the longer you remain invested in an instrument (more extended holding period), the lower is the risk of capital loss. Since the maturity period of liquid mutual funds is 91 days, the risk involved is quite low, and there is no impact of credit rating fluctuations on your capital.
Liquid funds are one of the safest investment options. You should invest in them if you want to create an emergency fund and earn returns on your excess capital. If you need help in drafting your investment strategy, you can connect with renowned financial advisory firms like FinEdge. Furthermore, make sure you compare different liquid funds before you plan to invest in them.