Liquid mutual funds are debt funds that invest in fixed-income securities like treasury bills, commercial papers, government securities, bank term deposits and certificates of deposits. The maximum maturity period for these schemes can be up to 91 days. Unlike other mutual funds, a liquid debt fund calculates its NAV (Net Asset Value) for 365 days. These schemes carry one of the lowest interest rate risks under the debt fund category.
Liquid mutual funds invest in money market capitals and commercial papers and is a debt mutual fund. Liquid mutual funds have no lock-in period and the maturity period is 91 days. Liquid mutual funds can only invest in the listed commercial papers and 20% of the assets should be liquid investments such as money market securities. Liquid mutual funds mainly earn through the interest payments on the debt instruments and have less significant capital gains and losses. The interest rates and the bond prices are inversely proportional. Hence when the interest rates fall the bond prices go up and vice versa. This is the most viable choice for short-term investments.
Liquid mutual funds have the following features which make them a good short term investment option:
Individuals interested in investing in liquid debt funds will want to know its advantages:
Maturity periods can be between three days to three months at most. You can instantly liquidate your funds during an emergency. An individual can sell the fund units without paying an exit load.
These liquid debt schemes invest in fixed income instruments like debentures and bonds. These have a fixed interest rate and short maturity tenure. These funds are less volatile and show favourable performance irrespective of the market situation.
Fund houses typically process the withdrawals of liquid fund investors within a day. That means an Asset Management Company (AMC) takes minimum time to settle the redemption amount of the investor.
Investors find liquid debt funds a lucrative option because of the tax benefits available.
While choosing the best liquid mutual fund, check the following three factors:
Like other mutual funds, liquid funds invest in securities with different market prices. The mutual fund’s NAV decreases or increases depending on the market price of underlying securities. However, a liquid debt fund’s NAV doesn’t decrease or increase as noticeably as other schemes.
As per SEBI guidelines, security maturing within 60 days doesn’t need to be marked to the stock market. An AMC has to add the interest component only. A debt fund’s interest amount via its instruments depends on the total interest sum and the number of days it is held.
Hence, the instrument’s price will usually remain steady, and the liquid funds’ NAV will show linear movement. This does not denote that the liquid schemes are risk-free.
Liquid funds invest in scrips having maturity periods of 91 days (maximum). So, investments in scrips with maturity tenures of 60-91 days are marked to market in accordance with their credit rating. However, if one/more underlying companies defaults on repayments, their credit rating, market price and NAV will decline.
Also Read: Fund Of Fund in Mutual Fund: 10 Best Fund Of Fund Schemes In India
Liquidity refers to the availability of your investment when you are in need. Liquid mutual funds have high liquidity as they have no lock-in period. A lower maturity period of 91 days also makes this mutual fund highly liquid and readily available to an investor in need.
Liquid mutual funds involve the following tax implications:
If an individual wants to make a short-term investment with lower risks, he/she can choose liquid debt schemes. Investors can utilise liquid debt funds as a stepping stone to invest in equity mutual funds.
They can begin to invest in liquid funds and then register for a systematic transfer plan to invest in an equity fund. This enables them to invest in a phased manner and take advantage of Rupee Cost Averaging.
If you are looking for a safe investment plan or to set aside money for emergencies, you may want to look for Navi Liquid Fund. You can initiate an investment in their direct plan at Rs. 500 only through platforms like Grow, Kuvera and Zerodha.
You can start investing in liquid mutual funds right now! As liquid mutual funds have no lock-in period and short maturity period, it is advisable to stay invested as long as possible to reap the benefits of compounding. Visit Navi Mutual Fund to get started.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
You can invest in a liquid mutual fund in either direct or regular methods.
If you want to invest directly you can choose from either of the two options below:
To invest in a regular way you have to do so through an intermediary or third party. For this, the expense ratio will be higher as the AMC has to pay a certain commission or brokerage fee to the intermediary.
To invest through an AMC or investment platform, you have to follow the given steps:
Also Read: 10 Best Medium Duration Debt Funds
Liquid mutual funds are a good avenue for investment, which you must know by now. But you should consider the following factors while investing in liquid mutual funds:
Also Read: Everything About Gold Funds: Benefits, Risks Involved and More
Many investors use liquid funds as emergency funds. These have as much liquidity as savings deposits and offer favourable returns at low risk. Investors desiring a 3 month-investment horizon can choose these funds. Before investing, you can create an effective investment plan.
Ans: Yes, you can research how old a scheme is and how it has been performing. But NAV is based on the variations in the underlying securities and should be the only guide to assess a scheme.
Ans: Share price signifies a company’s equity value, as mentioned on the stock exchange. It depends on the company’s performance and demand-supply movements. This is why the book value and market value of stocks matter.
Book value denotes a company’s value as per its balance sheet. Conversely, market value is a stock’s value as per its traded prices in the cash market. However, in a mutual fund, the fund unit has no market value. Purchasing the fund units at their NAV is similar to buying the fund units at the book value.
Ans: No, mutual funds do not provide guaranteed returns. Investments in mutual funds depend on market risk. You need to go through the offer document carefully to understand the risks associated with the scheme. However, liquid debt plans generally deliver positive returns on retrieval.
Ans: Fund houses usually credit the retrieval amount to your bank account within 24 hours. If the sum is not credited within the stipulated period, the AMC has to pay interest from time to time for the delayed period. As per SEBI, the interest for delaying is 15%.
Ans: Nifty 50 is a diversified index containing 50 stocks. It accounts for 13 sectors of the Indian economy. This index is associated with index funds, index-based derivatives and benchmarking fund portfolios. NSE Indices Limited manages and owns Nifty 50.
Ans: If you have to choose between fixed deposit and liquid funds, liquid funds will be a better option to go for in terms of liquidity and maturity period.
Ans: If you are investing a lump sum amount, you have to choose the investment plan thinking about when you want that sum back. If you want to invest for an emergency fund or short maturity tenure then you should invest in liquid funds through lump sum investment.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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