What are liquid funds – This is what you should know

Liquid funds invest in highly liquid short-term money market instruments like treasury bills, government securities, certificates of deposit and commercial paper. They aim to grow your money while providing stability of principal and liquidity. Liquid funds are a safe investment option with low risk and potential for better returns than savings accounts.

Why to invest in liquid funds?

Earn higher returns

Liquid funds currently offer 6-8% annual returns which beat most savings accounts. They can generate income through dividends and capital gains over the short term.

Preserve capital

Liquid funds invest in highly rated securities with maturity up to 91 days that provide safety of principal while minimizing interest rate risk. The net asset value (NAV) of the fund remains largely stable.

Easy withdrawals

You can withdraw money from liquid funds within the same business day or T+1 day. There is minimum risk of exit loads or penalties on withdrawals.

Low costs

Liquid funds are passively managed with expense ratios ranging from 0.25-0.5% annually. Lower fees mean higher returns for investors. 

Tax efficiency

Dividend distribution tax is 28.84% for liquid fund returns earned for a holding period over 3 years. Due to short term nature, some liquid funds also try distributing dividends to avail this lower tax rate benefit.  

Why should you invest in liquid funds?

Emergency fund

Liquid funds are ideal for parking emergency funds. You earn higher interest while having access to your money immediately without penalty or fees.

Short-term goals

If you need money within 3-6 months for a downpayment or tuition fees, liquid funds provide stability and easy liquidity.

Idle cash

nstead of settling for a low-interest savings account, invest spare cash in liquid funds to generate higher returns until you need to deploy it elsewhere.

Businesses

Corporates often invest working capital or surplus funds in liquid funds and other money market instruments as they are low risk and highly liquid.  

You can invest in liquid funds through the systematic investment plan or lump sum amounts. Minimum investment per fund is Rs. 500 and there is no lock-in period.  Use an SIP calculator to determine the amount you need to invest to achieve short term goals.

Staying fully invested in equities leaves you exposed to market volatility and risk of capital loss. Liquid funds provide stability and income generation for a portion of your portfolio. They offer higher returns than savings accounts with minimal risk to principal, making them ideal for short term money needs. Liquid funds give your money ample room to grow while staying within arm’s reach when needed.

Conclusion

Liquid funds are an optimal solution for parking emergency funds, working capital needs or idle cash. They provide easy liquidity and safety of capital along with higher returns than savings accounts. Liquid funds suit short term financial goals, generating income over 3-6 months. Corporates and retail investors benefit from their tax efficiency, low costs and stable NAVs. Amid uncertainty, liquid funds offer solace, simplicity and returns.