Liquid funds could also be used when you have a sudden influx of cash. With interest rates on savings bank deposits reduced by 50 basis points to 3.5 per cent, many financial planners are advising investors to use liquid funds ultra short-term funds as a substitute to earn higher returns.
What are liquid funds? When could one use them?
Liquid funds are debt mutual funds that invest your money in very short-term market instruments such as treasury bills, government securities and call money.
These funds can in vest in instruments up to a maturity of 91 days liquid funds are used by investors to park their money for short periods of time typically 1 day to 3 months. For example, if you have your child’s school fee installment, holiday planned over the next two months, you could park the money in a liquid fund.
Liquid funds could also be used when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on. Many equity investors also use liquid funds to stagger their in vestments into equity mutual funds using the systematic transfer plan (STP), as they believe this method could yield higher returns.
What kind of returns can investors expect from liquid funds? How soon can such funds be redeemed?
Investors can redeem their in vestments and money reaches their bank account on the next working day. There is no entry or exit load by fund houses in liquid funds. As per Value Research data, the category of liquid funds has given a return of 6.56 per cent over the past year.
This is higher than the 3.5 per cent offered by most banks on their savings account.
Is there any risk of investing in such funds?
Liquid funds are considered to be least risky as well as least volatile in the category of mutual funds. This is because they generally invest in instruments with high credit rating (P1+). The net asset value of these funds sees a change to the extent of interest income accrued, including weekends.
How is this category different from other debt funds?
Liquid funds are unique when compared to other debt funds with respect to applicability of Net Asset Value (NAV).For investments up to 2 pm on a particular transaction day (subject to funds available for utilisation by 2 pm), the units are allotted on previous day’s NAV.
Thus liquid funds are the only category to get previous days NAV. For redemption up to 3 pm on a particular transaction day, the units are redeemed at the same days NAV and proceeds are credited to the bank account the next morning.