Things You Should Consider Before Investing In Liquid Funds

With the progression of mutual funds in India, real-time investors keep track of the most viable investment opportunities to obtain the best returns on their money parked in such mutual funds. One such type is liquid funds. The liquid mutual funds in India are one of the most appealing due to their low-risk features. These are known to be the class of debt funds that mostly are invested in the short-term funds that generate fixed-interest such as the money market instruments. Some of the common liquid funds are Treasury bills, commercial paper, government securities, etc. 

Liquid funds require a clear understanding of an investor’s investment horizon, to entail safer returns and invest in the right type of securities without being overwhelmed by the choices available. The core aim of a liquid fund is to provide an investor with capital appreciation, capital security as well as high liquidity. Therefore, an investor needs to select high-quality debt instruments And invest as per the mandate of the scheme. Also, a shorter maturity period makes the liquid funds to be less-prone to the change in interest rates and provides a better return than the traditional saving schemes.

Who Should Invest in Liquid Funds?

If you are someone who has substantial cash left idle and are contemplating short-term investment potential, investing in liquid funds can be an excellent choice. Ideally, instead of opting to park your extra funds in a traditional forum such as a savings account, it is more sustainable to invest in liquid mutual funds to generate higher returns.

Also, if you are new to investing business, liquid funds may prove to be a preferable choice to start your investment journey with. Then over some time, you can conveniently choose to invest in the other options like equity funds. That paves the way to a smarter and sensible decision-making process when it comes to investing choices.

Things to Consider as an Investor

  • The risk involved: The liquid funds substantially have a lower risk than that of other mutual fund orientations. It mostly relates to the market turmoil in net asset value (NAV). However, the NAV in terms of liquid funds has been witnessed to not fluctuate as frequently as that of the underlying assets that have the tendency to mature in a range of 60 days to 91 days. This intends to prevent the fund’s NAV to get affected significantly due to the fluctuations caused by the underlying price of the asset. 
  • Investment potential: Liquid funds can be considered to be an ideal option if you wish to invest the extra funds for a shorter tenure. These short-term horizons realize the ultimate potential of the targeted securities. 
  • Return generation: Liquid funds generate profits of about 7% to 9%. This is much higher than that of a saving account or FD that can generate maximum returns up to 5%. However, if you are someone who can manage to have a much higher risk appetite you can even consider options like equity mutual funds which can generate even better returns.
  • Financial Targets: Liquid funds are a great choice to secure an emergency fund. Additionally, it helps to pave the way to generate higher returns which are intended for you to conveniently withdraw your parked money in situations of emergencies without adding to the extra cost.
  • Cost-cutting: Liquid funds require a nominal fee so that they can be managed in investments in the form of an expense ratio. The upper limit when it comes to expense ratio, however, mandated by SEBI is supposedly 1.05%. Now comparing the expense ratio with the returns generated through liquid funds, the cost must be lower, hence liquid funds are a generous way to upgrade your investments.

For investors who are looking for short-term investment opportunities with moderate risk and decent returns, liquid mutual funds are one of the best options available in the investment market. However, it is advised to apply your due diligence and check the terms and conditions related to your investment carefully to save yourself from any kind of investment fraud.