Saturday, June 27
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INVESTING IN LIQUID MUTUAL FUNDS

What is liquid fund?

Liquid funds are a type of mutual funds that primarily invest in ultra-short money market instruments which have a maturity period of up to 91 days. These mutual funds invest in money market instruments like Commercial Paper (CP), Term Deposit, Certificate of Deposit (CD), Treasury Bills (T-Bills), etc. These open-ended debt mutual funds are highly liquid in nature and carry limited risk.

Who should invest in liquid mutual funds?

Liquid fund schemes are suitable for those investors who wish to park their idle, surplus money for an ultra-short duration while also seeking the safety of their capital. They are also ideal for risk-averse investors. Many equity investors utilise these funds as a way to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP).

Why should one invest in these mutual funds?

Following are some of the reasons why an investor with short-term goals should consider investing in liquid mutual funds:

  1. Low-risk
    Since liquid fund schemes invest in money market instruments that mature in 91 days, the risk due to change in interest rates significantly decreases. Also, unlike other mutual fund investments, these funds don’t experience constant fluctuations in the Net Asset Value (NAV) of the schemes, which further diminishes the risk. However, one should be mindful that liquid funds are not entirely risk-free.
  2. Liquidity
    Liquid funds are effortless and quick to access when you take redemption of a fund into account. The money is transferred into your account within a day after filing the redemption request.
  3. No entry or exit load
    To make liquid fund schemes more accessible to the investors, liquid funds do not charge any exit or entry loads. An exit load is a charge paid by the investor on early redemption of the fund before the due period.

When should you invest in liquid funds?

Interest rates and bond prices are inversely proportional to each other. This means that when interest rates in the economy go up, prices of bonds issued at a lower rate than the new one goes down, and vice versa.

However, experts believe that one should invest in liquid funds irrespective of the market scenarios as liquid funds tend to work well in serving your short-term needs and goals.

How to invest in liquid funds?

Just like any other mutual funds, investing in liquid funds is quite easy. Invest in these mutual funds onlineby submitting a duly filled application form along with a bank draft or a cheque. You can send this application form toany registrars like Investor Services Centres (ISC)or Computer Age Management Services (CAMS) or the respective Asset Management Company (AMC)along with the essential documents. Alternatively, you can also invest via your bank if they offer such services.

Always check for consistency in the performance of liquid funds across a period before choosing the perfect liquid fund for you. Remember, liquid funds are not entirely risk-free. But, they can act as a good investment haven for fulfilling your short-term goals such as planning for a wedding or a vacation, paying for your child’s tuition fees, etc. Happy investing!