What Are Liquid Funds?

Ask any seasoned investor, and they will tell you that mutual fund investments are a long-term game. But what about investors who desire quick returns or want to park their investments for only a few months? Well, they can consider investing in liquid funds.

What are liquid mutual funds?

In simple terms, liquid funds are debt mutual fund schemes wherein investors can invest money in fixed-income instruments that mature within 91 days. Investors with ample surplus funds invest in these instruments to park their funds for a few weeks and earn returns.

Besides, investing in liquid mutual funds is fairly easy. The NAV is calculated for 365 days, and the withdrawals get processed within 24 hours.

These funds also face the lowest interest risk, making them an excellent investment choice for beginner investors or those with a low-risk tolerance.

Now that we’re clear on what are liquid funds, let’s understand how they work.

How do liquid mutual funds work?

First, the fund manager observes the debt securities and selects high-quality ones according to the mutual fund scheme’s mandate. Next, the manager checks the portfolio's maturity and ensures it isn’t over 91 days.

Remember, the short maturity period ensures that the fund does not experience drastic interest rate fluctuations, even in a volatile market.

Once the maturity period is verified, the fund manager matches the maturity of the individual securities to that of the portfolio. Then they try to employ strategies offering better returns.

With what is liquid mutual funds and how they work out of the way, let’s look into the various factors investors should consider before investing in them.

Factors to consider before investing in liquid mutual funds

#1. Risks

Liquid funds are some of the lowest-risk investment avenues. Given they have a short maturity period of 91 days, they do not witness market rate or interest rate fluctuations. That said, the credit rating of individual debt securities can change anytime. If they drop, the NAV drops and affects the returns from the fund.

#2. Returns

Liquid funds are known to offer better interest rates than regular savings bank accounts. The average rate is roughly between 7% p.a. to 9% p.a.

#3. Investment plan

Liquid funds serve those investors best that have a solid investment plan. After all, they behave as a place to park surplus funds, and are low risk, low-return investments.

#4. Expense ratio

Investors will get charged an annual fee for liquid funds for the fund management services.

Note that the expense ratio for these funds is lower. Besides, most investors easily hold the securities until maturity. This means there are no additional charges on liquid funds either.

In simple terms, liquid funds do not incur expenses due to excessive buying and selling of debt securities. This keeps the expense ratio low.

With all this information in your hands, you need not spend another moment typing “What is liquid mutual funds” or “What is liquid fund in mutual fund” into your web browser. If you’re someone who prefers high liquidity or are a low-risk investor, you can begin investing immediately.

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