Let’s say you have been saving up for a while with a specific goal in mind. Perhaps to purchase a car or make a down payment on a house in a few months. Until then, you might want to invest that sum in a short-term plan that has a low-risk profile, high liquidity, and offers better returns than a savings account or fixed deposit. In this scenario, liquid mutual funds can be the ideal choice for you.
Liquid mutual funds explained.
Liquid mutual funds belong to the category of debt funds, known for investing in fixed-income instruments like government securities, corporate bonds, commercial papers, treasury bills, etc. The maturity period of a liquid mutual fund is up to 91 days. Since it invests only in short-term assets, the fund is relatively unaffected by market volatility and can generate a fixed interest rate, making it a stable investment option.
Benefits of liquid mutual funds
There are several reasons why liquid mutual funds have started gaining popularity over fixed deposits and savings accounts. Let’s talk about these benefits in some detail.
1. High liquidity
As the name suggests, offering high liquidity is the main objective of liquid mutual funds. This means you can redeem your principal amount plus accrued interest as and when you need it, even before the maturity period of 91 days. Once you decide to withdraw the total payout, it gets credited to your bank account within one working day. Without a lock-in period, you can operate your funds as a savings account.
2. Low risk
The fund manager will only invest in high-quality money market instruments that mature in three months on average. This decreases the fund’s vulnerability to market fluctuations and allows the interest rate to remain fixed until withdrawal. However, this doesn’t mean liquid mutual funds are entirely risk-free. If the Net Asset Value (NAV) suddenly drops due to a reduction in the credit rating of an instrument, the value of your fund will automatically fall. While the short maturity period prevents this from happening, there is still a slight risk associated with this type of mutual fund.
3. High returns
Liquid mutual funds are usually compared to fixed deposits and savings accounts because of the low risk and high liquidity profile. Where these funds differ from the two is the profit margin. On average, liquid funds tend to generate returns at the rate of 7-9%, whereas a savings account offers 4%, and a 3-year fixed deposit offers 5-6%. This is due to returns not being guaranteed by liquid funds, but historically, they have generated consistent gains and are considered a secure option.
To sum it up
Overall, liquid mutual funds are perfect for those who want to maximize the potential of their savings in a short period of three months or less. You can fulfill immediate goals or set money aside for financial emergencies. Initiating a liquid fund is also as quick and hassle-free as withdrawing your earnings. Simply download the Tata Capital Moneyfy app and start investing – anytime, anywhere.