How can liquid funds offer instant liquidity?

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Liquid funds are debt mutual funds that primarily invest in money market instruments like treasury bills, government securities, and call money, which have a short maturity period of up to 91 days. They are known for their high liquidity and low-risk profile, making them a good option for investors seeking a balance between relative stability of capital and accessibility. Let’s take a look at the key features of liquid funds, and how they offer instant liquidity to the investor.

  • Table of contents
  1. Key features of liquid funds
  2. Other features of liquid funds
  3. FAQ

Key features of liquid funds

High liquidity: As the name suggests, liquid funds offer high liquidity, which is critical for investors who need quick access to their funds. In most cases, investors can withdraw their money within 24 hours on business days, making liquid funds a suitable option for parking surplus cash that might be needed at short notice. This feature of instant liquidity makes liquid funds an attractive alternative to savings accounts for managing emergency funds or short-term financial goals. Liquid funds also offer the insta redemption facility, in which, up to Rs. 50,000 or 90% of the invested amount can be redeemed instantly.

Low/Low to moderate risk: One of the most significant advantages of liquid funds is their low/low to moderate risk profile. Since these funds invest in instruments with short maturity periods, typically not exceeding 91 days, they are less susceptible to interest rate volatility. The short duration helps in mitigating the risk associated with changes in market interest rates, which can significantly impact the price of longer-duration bonds. Therefore, liquid funds are considered a relatively stable investment compared to other debt funds that invest in longer-maturity securities.

Relatively stable returns: While returns from liquid funds are not guaranteed, they are generally more stable and predictable compared to the returns on other market-linked investments like equity funds. Because these instruments are short-term with a fixed interest rate, the returns tend to be less volatile. However, it is important to note that the returns from liquid funds, though relatively stable, are usually lower than those from long-term debt funds or equity investments.

Diversification: Liquid funds invest in a diversified portfolio of high-quality debt instruments. This diversification helps in spreading the risk across various securities, further reducing the overall risk of the fund. It is an effective way for investors to gain exposure to different money market instruments with a single investment.

Suitability: Liquid funds are particularly suitable for investors looking to park their surplus funds for short periods. They can be an ideal choice for conservative investors who prefer limited impact on capital invested and liquidity over relatively higher returns. They are also suitable for corporate and institutional investors for managing their working capital requirements.

The standout feature of liquid funds is their instant liquidity. This means investors can access their funds almost immediately, often within a day, which is a significant advantage, especially in emergency situations. This quick access to cash without significant loss in value is what sets liquid funds apart in the mutual fund universe.

Other Features of Liquid Funds

  • Flexibility in investment amount: Investors can start with relatively small amounts, making them accessible to a wide range of investors.
  • No lock-in period: Unlike fixed deposits, liquid funds do not have a lock-in period, providing flexibility to redeem part or all the investment as needed. There is, however, an exit load imposed for redemption within a certain number of days from allotment.
  • Suitability for short-term goals: Liquid funds are ideal for short-term financial goals or as a parking ground for funds awaiting deployment in other investment avenues.

For example, the Bajaj Finserv Liquid Fund is an open-ended scheme focusing on providing a level of income consistent with the preservation of capital, lower risk, and high liquidity. It offers low risk and high liquidity through investments in money market and debt securities with a maturity of up to 91 days. This fund aims to provide a level of income consistent with its objectives, making it suitable for investors seeking potentially stable returns and quick access to their money. For detailed scheme information, click here

Conclusion

Liquid funds offer a blend of low risk, high liquidity, and relatively stable returns, making them a suitable investment option for short-term financial needs and for investors with a low-risk appetite. Offering the dual benefit of relative stability and immediate accessibility, liquid funds are particularly useful for managing emergency funds or immediate financial requirements, providing a convenience not commonly found in other investment types. However, it is crucial for investors to understand the fund's objectives and risks before investing.

FAQs:

Why invest in liquid funds?
Investing in liquid funds is ideal for those seeking quick access to their funds with minimal risk and relatively stable returns.

What is the liquid fund advantage in getting cash?
The main advantage is the ability to quickly withdraw your investment, providing instant liquidity in times of need.

How does a liquid fund benefit for cash emergencies?
Liquid funds provide an efficient way to access cash almost immediately, ensuring funds are available during emergencies without the typical penalties or delays of other investment options. However, there is an exit load applicable for investment in liquid fund.

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.