Here is how adding liquid funds to your portfolio can be beneficial

Liquid funds are one of the subcategories of debt funds. Liquid fund investment is made towards securities with a maturity of up to 91 days. Liquid mutual funds invest in debt and other money market instruments like certificates of deposit (CD), debentures, bonds, commercial papers (CP), and treasury bills (T-bills). The returns of these funds are not affected by market movements and come with a short maturity period. As this mutual fund offers high liquidity, it is named thus.

How do liquid funds work?

Liquid funds primarily aim to provide high liquidity and capital protection to its investors. For that, these mutual fund investments are towards high-credit debt instruments like CDs, CPs, and T-bills, i.e., securities with maturity of up to 3 months. Unlike equity funds, the liquid fund NAV does not fluctuate because of the low maturity period. So, when you redeem your liquid fund investment, your withdrawals are usually processed in 24 hours.

What are the benefits of liquid funds?

Here are a few advantages that are associated with investing in liquid funds:

  • Short tenure:

These funds invest in short-term fixed-income securities and offer high liquidity. You can use these funds to build an emergency fund. Also, these funds provide higher returns than other investment options like FDs.

  • Low risk:

Debt funds are low-risk investments because their performance does not rely on market movements. However, it is imperative to note that interest risks are involved in these funds. The maturity period of 91 days makes liquid funds one of the safest investment options. Because of their short-term securities, liquid funds have minimum risks. Also, these funds invest in high-rated money market instruments, further lowering the investment risks. However, debt funds might be riskier if you hold on to them for a long duration.

  • High liquidity:

The maturity period of these funds is approximately 91 days, one of the reasons liquid funds are a reliable option for creating emergency funds. Furthermore, adding a few debt securities with equity investments diversifies your mutual fund investment portfolio. The balance of short and long-term investments serves as a hedge against investment risks.

  • No Lock-in period:

Despite the 91-day maturity period, the lock-in period is not applicable for liquid funds. Therefore, redeeming your investments is easy as such requests are unusually approved within a day. Some liquid funds even allow an instant withdrawal up to a certain sum. There is no exit load on liquid funds for a premature withdrawal.

  • Expense ratio:

The expense ratio of liquid funds is low because they are managed passively. Instead, they invest in A-rated securities. Features like a low expense ratio and no exit load result in higher take-home returns.

Who must consider investing in liquid funds?

Invest in liquid funds if you are:

  • If you are a risk-averse investor because the risk level of liquid funds is low
  • If you are seeking a safe investment option that provides high returns
  • If you are looking for parking windfall gains
  • If you are looking to balance your equity-concentrated portfolio

So, what are you waiting for? Determine your monthly investment amount using the online SIP calculator.

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