What is liquid fund

A liquid fund is a type of mutual fund that primarily invests in money market securities and debt instruments. These funds are designed to provide a level of income that is consistent with the objectives of preserving capital, maintaining relatively lower risk, and ensuring high liquidity.

Liquid funds are able to achieve these objectives by focusing their investments on instruments with a maturity of up to 91 days only. Essentially, the assets within a liquid mutual fund portfolio are those that can be quickly converted to cash. They include treasury bills, commercial paper, and other short-term instrument.

Liquid funds can be a suitable choice for various investors, including individuals as well as corporates managing short-term cash flows. These funds are also suitable for those looking for alternatives to the traditional savings account, and those desiring short-term, low-risk investment options.

Additionally, liquid funds serve as an excellent avenue for building contingency or emergency funds. Investors who wish to keep their money in a relatively low-risk basket, until a suitable equity asset class opportunity arises, can also find liquid funds beneficial.

To summarise, liquid funds can serve as the ideal investment vehicle for investors prioritising relative stability, liquidity, and decent returns.

Benefits of investing in liquid funds

Relatively better return potential: When it comes to investment avenues, the major advantage of liquid mutual funds is that they tend to offer an enhanced investment experience compared to traditional product. Their structured investment approach often results in a relatively better return potential.

Relative stability of investment: Liquid funds can offer a shield against market volatility by investing predominantly in highly rated money market and debt instruments with up to 91 days of residual maturities. This allows the principal to remain relatively stable, making the fund less susceptible to market fluctuations.

Cash management flexibility: With features like the Insta-Redemption facility (up to Rs. 50,000), liquid funds provide the flexibility of immediate cash access. This is especially beneficial in case of emergencies or unplanned expenses. Moreover, with a T+1 settlement timeline, investors can redeem their units at any time, making cash planning more efficient.

Versatility in investment: For those waiting for the right market conditions or opportunities in the equity asset class, a liquid fund can provide a shelter to park funds temporarily. It helps keeps the money relatively stable.

Relatively low risk: Given that liquid funds primarily invest in highly rated instruments with short maturities, the associated risk is minimal. This makes them a preferable choice for conservative investors or those who prioritise relatively low volatility.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.