Mutual funds are subject to market risks. Therefore, it would be wrong to consider mutual fund investment as entirely safe. Since interest payments are fixed and the principal amount is returned, debt instruments are considered low-risk financial assets with low returns. The same applies to liquid mutual funds. They are considered more secure than other types of liquid funds.
Assets invested are not tied to the long term: liquid funds are ideal for parking your money for the short term. Unlike fixed deposits or equity mutual funds, there is no need to stay invested for long. You are free to go out at any time.
Not have a lock-in period: bank fixed deposits require you to stay invested for a mutually agreed period. It can vary from a minimum of three months to five years. If you break a fixed deposit in the middle, the bank will penalize you. For some mutual funds, such as equity-linked savings schemes, there is a lock-in period of three years. With liquid funds, there is no obligation to stay invested for a minimum period.
Liquid funds offer superior liquidity: Liquid funds get their name from the high liquidity that they provide. Redemption can claimed until 10 am the next day, but there is very little catch here. Also, up to Rs 50,000 per folio can be redeemed per day. Therefore, it is good to get more folios. If the situation demands, it will allow you to redeem more in a single day.
Offers weekly or monthly rate hikes and dividend payouts: you may be unsure when you want to redeem an investment in a liquid fund. You can choose to expand the units that contribute to your portfolio. You can also select the payment option for dividends, which is weekly or monthly.
You can transfer funds at any time: If you believe the valuation is correct, you are free to move the hold to equity funds along with liquid funds.
A liquid fund can be your contingency fund: to overcome unforeseen circumstances; you need to maintain a contingency fund. In your business, there may be a job loss, ill health, or a temporary setback, all of which will require money to get through the crisis. This balance can be kept in your savings bank account. If you invest money in a liquid fund instead, you will earn more.
Risk of Liquid Funds
You can get some savings account that provides risk-free returns. It means that you are guaranteed that your balance will paid with interest. Conversely, banks often do not change interest rates on savings accounts.
However, liquid funds are not entirely risk-free. You can see them as a tool for low-risk returns. They may be subject to interest rate risk and credit risk because they invest primarily in debt instruments.
Changing the prevailing interest rates can change the price of debt instruments. This, in turn, can cause liquid fund’s NAV to fluctuate. Because liquid funds primarily invest in short-term debt securities, you may not get sharp fluctuations in the NAV of the fund.
As far as credit risk is concerned, it shows the possibility of default by the issuer of a debt instrument in repaying interest and principal. Liquid funds ensure that only the best creditworthy tools are used to invest your money.
Through maintaining a well-diversified portfolio of bonds, the fund manager can minimize credit risk.
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