Thursday, May 19, 2022
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What are Liquid Funds

Liquid funds are those debt funds which invest in various financial instruments such as commercial papers, treasury bills, government deposits and other securities having maturity at most 91 days. These funds contain high level of liquidity. These are also one of the best choices for excess income investment.

ADVANTAGES OF LIQUID FUND INVESTMENT

  • It ensures high level of liquidity and security as the investment is made in quality credit instruments like Treasury bills, Certificate of Deposit and Commercial paper.
  • When exposed to the variations in market rates, the Net Asset Value of liquid funds will not undergo much  variations. This is due to the average maturity of 91 days.
  • These funds are risk-less comparing to similar funds.
  • These funds are finer than savings bank deposits. This is because a depositor can have higher returns. These funds offer about 6.5%-8.5% return on average.
  • The investors can withdraw their funds whenever they want. therefore, it also acts as an emergency fund.

WHO SHOULD INVEST IN LIQUID FUNDS?

Those who with considerable amount of cash along with those who are interested in short-term investment can invest in liquid funds. You can earn much profit from this investment rather than leaving money in your savings account. This also acts a medium for equity funds. You can invest money in your liquid funds and later you can transfer it to an equity fund over a certain period.

WHY SHOULD YOU INVEST IN LIQUID FUNDS?

These funds are suitable for those who are seeking choices to invest their excess cash or idle money as these deliver high level of liquidity and higher returns.

These funds are acceptable for accomplishing short-range financial goals. Some funds create about 7%-9% returns while savings bank deposits offer 2.5%-4%. Therefore, these funds are more suitable than savings bank deposits. The portfolio allocation of these funds is least-risky, less-volatile or default linked.

HOW TO FIND THE SUITABLE LIQUID FUNDS?

There are various factors to consider while analyzing liquid funds.

  • Size of Fund: Mostly, institutional investors use liquid funds. If an unexpected redemption happens, a small liquid fund would lose most of its important assets. Consequently, it will lose its ability to invest and produce more returns. Therefore, funds with more assets are suitable for small-sized funds.
  • Returns: You should analyze the returns in 1-month or 3-months to determine fund performance. The performance of a better liquid fund can be identified through the considering the 1-month or 3-months returns over the past few years.
  • Stability of Portfolio: These funds should have the ability to keep the investment secure and stable. For this reason, investors should analyze the portfolio of a particular fund to ensure that the fund is invested in different securities.

EXAMPLES OF HIGHLY PERFORMING LIQUID FUNDS IN INDIA

 

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