7 Common Myths About Liquid Funds Debunked

Liquid mutual funds offer a relatively stable avenue to individuals looking for a short-term investment option. These funds primarily invest in debt and money market securities with a maturity of up to 91 days. This makes them good for parking extra cash, saving for short-term goals or building an emergency fund.

However, there are some common misconceptions about liquid funds among. Let’s take a look at what these are, and separate myth from reality.

• Table of contents

1.  Common myths about liquid mutual funds
2. Myth 1: Liquid funds are completely risk-free
3. Myth 2: Liquid funds offer fixed returns
4. Myth 3: Liquid funds are not very different from savings accounts
5. Myth 4: Investing in liquid funds is complicated
6. Myth 5: Liquid funds are for large investors only
7. Myth 6: Liquid funds are the same as overnight funds
8. Myth 7: Withdrawals from liquid funds take time

Myth 1: Liquid funds are completely risk-free

Despite their relative stability, liquid funds are not completely free of risk. Liquid funds invest in debt securities, which can be affected by interest rate changes and risk of default by the debt issuer. However, their short investment horizon helps mitigate these risks significantly.

Myth 2: Liquid funds offer fixed returns

Interest on fixed deposits and savings accounts is guaranteed. Returns on liquid funds, however, depend on market conditions and are not guaranteed. In normal markets, their return potential is usually higher than that of savings accounts and is comparable to that of short-term fixed deposits. However, returns can fall during economic slowdowns. Also, unlike fixed deposits and savings account, returns in liquid funds are not guaranteed.

Myth 3: Liquid funds are not very different from savings accounts

Though liquid funds provide similar liquidity and have low risk, they can potentially offer higher returns than regular savings accounts. This is because they invest in debt securities that have the potential to yield reasonable returns.

Myth 4: Investing in liquid funds is complicated

Investing in liquid funds is straightforward and can often be done online with minimal paperwork.

Myth 5: Liquid funds are for large investors only

It is a myth that only large investors can benefit from liquid funds. These funds are suitable for retail investors who want to park their surplus cash for short a few weeks or months. They offer an opportunity to earn better returns than that offered by savings accounts. They can be a suitable avenue to park idle money or to build an emergency cash reserve.

Myth 6: Liquid funds are the same as overnight funds

Both are debt funds, but overnight funds invest in securities that mature in one day, while liquid funds invest in securities with maturities up to 91 days. Liquid funds may offer slightly higher return potential than overnight fund. Meanwhile, overnight funds may have a slightly lower risk profile.

Myth 7: Withdrawals from liquid funds take time

Liquid funds are known for their high liquidity. Some funds offer instant redemption upto a certain investment amount, while others may take up to one working day to complete.

Conclusion

Liquid funds can be good for parking surplus or emergency funds. They are low-risk/low to moderate risk and offer better returns than savings accounts. By learning the facts about liquid funds, investors can make an informed decision on whether to invest in them.

FAQs

Is it stable to invest in liquid mutual funds?

Liquid funds are relatively stable compared to other high-risk investments. They invest in short-term, high-quality debt instruments, which typically carry lower risk.

Is there any loss in liquid funds?

While liquid funds are generally stable, they are subject to market risks. They may yield low returns or even negative returns if the market conditions are unfavorable.

Are liquid funds stable during a recession?

Liquid funds are typically more stable on a relative basis than long-duration debt funds or equity during a recession. But, like all market-linked investments, they are not safe from economic downturns and can be hurt by market disruptions.

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.