What are Liquid Funds?

Liquid Funds are a category of mutual funds which makes investments in assets having a residual maturity of up to 91 days. The invested assets are not held hostage for an extended period of time as there is no lock-in period. Investments are made in fixed-income instruments like commercial papers, government securities, treasury bills etc. In the debt fund category, these funds have the lowest interest-rate risk.

Factors to be considered before investing in Liquid Mutual Funds in India :

Before investing in liquid funds in India, keep the following factors in mind:

1.Risk

Liquid fund's underlying assets have a maturity of up to 91 days, thus there isn't much volatility in them. As a result, the fund's NAV remains essentially constant. Liquid funds are hence low-risk investments. It is crucial to remember that the NAV may decrease if the credit rating of any underlying security declines. Liquid assets aren't risk free.

2. Returns

You may quickly determine that liquid funds usually offer returns of 7-9% by looking at their performance. Consequently, they outperform the 4% returns on savings account deposits.

3. Expense Ratio

Liquid funds likewise impose an annual fee for providing fund management services, just like all other mutual fund schemes. It is known as the expense ratio and represents a percentage of the fund's total assets. Most debt investors like funds with lower expense ratios because they help them maximise their gains. Additionally, the majority of liquid fund managers invest in and hold the security until it matures. As a result, the fund's expense ratio remains low because it does not incur costs from frequent buying and selling of securities.

4. Investment Plan

Many investors employ liquid funds to set up an emergency reserve. They are just as liquid as savings account deposits and offer respectable returns at reduced risks. Investors with a 3-month investing horizon should use these ETFs. Therefore, before investing in these funds, be careful to make an appropriate investment plan.

To conclude

Liquid funds are ideal for low-risk investors looking to park surplus cash for the short term. The biggest advantage of liquid funds is that it offers superior returns than bank deposits. Since liquid funds have no lock-in period, the funds can be withdrawn instantly.

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