Liquid Mutual Funds Advisor in Mumbai, India.
Liquid funds are the mutual fund schemes that invest their corpus in financial instruments such as Bank fixed deposits, Treasury Bills, Bill Rediscounting, Commercial Paper and other debt securities with maturities up to 90 days. The NAV (Net Asset Value) of the funds is calculated for 365 days, unlike other debt mutual funds where NAV is computed for the business days only.
Liquid Funds have no restrictions of any lock-in period. These funds allow withdrawals to be processed within 24 hours on the business days. So for all transactions received within a cut of time (say 2:00 pm) where money is also realized within the cut-off time, the units are allotted as per the previous day NAV. Liquid funds have the lowest interest risk associated with all the class of the debt funds. This is because they primarily invest in the fixed income securities with short maturity. Another notable benefit of the liquid funds is that they do not have any entry or exit load.
Since these funds provide liquidity and not high returns, it is advised by Infinitum Wealth advisors that investors looking to park their idle money should consider liquid funds as a viable option. However, one should be speckled enough not to put one’s emergency corpus in liquid funds since liquid funds provide redemption in such a way that money is the credit on your account only the next day. So parking all emergency funds in liquid funds is not a very good practice.
Ideally, the liquid funds should be utilized to achieve your short-term objectives. Since some funds generate around 8% to 9% returns, they should be preferred over a savings account which provides 4% to 6% returns. In fact, nature of their portfolio allocation is such that there is not extreme risk of volatility or default associated with liquid funds provided one invests in high rated (AAA or AA) liquid funds.
Things considered as an investor
– Fund Objectives:
Liquid funds are least risky among all the debt funds. The Net NAV doesn’t fluctuate too frequently because underlying assets mature within 60-91 days. This somehow prevents fund NAV from getting impacted too much by the underlying asset price fluctuations. However, there is a chance of a sudden drop in NAV in case of a sudden downgrade of the credit rating of the underlying security. To put it easily, liquid funds are not completely risk-free.
Historically, liquid funds have been found generating returns in the range of 7%-8%. It is way higher than mere 4% returns obtained on a savings bank account. Even though returns on liquid funds are not guaranteed, in most of the cases they delivered positive returns upon redemption.
Liquid funds charge fee to manage your money called an expense ratio. Till now SEBI had mandated an upper limit of expense ratio to be 2.25%. Considering hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to provide relatively higher returns over a short period of time.
Liquid funds are meant to invest surplus cash over a very short period of time say up to 3 months. Such short horizon helps to realize the full potential of the underlying securities. In case you have a longer investment horizon of about 1 year, then you should consider investing in ultra-short term funds to get relatively higher returns.
If you want to create emergency funds, then liquid funds prove to be very useful. In addition to receiving higher returns, they help you to take out your money easily in case of emergencies.