Is it suitable to invest in liquid funds during a low interest rate scenario?

liquid fund in falling interest rate
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The impact of low interest rates has been felt by investors who predominantly invest in fixed-income investment instruments like fixed deposit (FD). Thus, it is important to look for alternatives. Mutual funds are known to offer relatively better return potential than traditional savings account with marginally higher risk as compared to savings account. In fact, certain schemes like liquid funds come at a relatively low risk and offer high liquidity that may be preferred by conservative Indian investors.
So, are liquid funds suitable to invest in the current financial landscape? Let’s find out.

  • Table of contents:
  1. What are liquid funds and how do they work?
  2. Four important features of liquid funds
  3. Investing in liquid funds in a low interest rate scenario
  4. Why you should invest in Bajaj Finserv Liquid Fund
  5. FAQ

What are liquid funds and how do they work?

Open-ended mutual funds that invest in short-term debt instruments with a residual maturity of up to 91 days are known as liquid funds. The fund manager invests in certificates of deposit (CD), commercial papers, treasury bills, government securities and bonds to get relatively stable returns on investment with minimum impact to the principal amount.
You can invest in liquid funds if:

  • You are a conservative investor.
  • You are new to mutual fund investments.
  • You want to park surplus cash for relatively better return potential.
  • You are looking for a short-term investment.
  • You want an investment instrument that offers high liquidity.
  • You want to build a contingency fund.
  • You want to meet your short-term financial goals like funding a vacation, buying a home appliance, etc.

Four important features of liquid funds

Here are the features you should know before you invest in liquid funds:

Risk level: Because of the relatively lower risk level as compared to other debt mutual fund schemes, many Indian investors seek to invest in liquid funds. Liquid funds also tend to have a low interest rate risk, credit risk and inflation risk.

Liquidity: Since liquid funds are open-ended mutual funds, you can easily redeem them by placing a request. You can opt for insta redemption facility, wherein, you can redeem up to Rs. 50,000 or 90% of the invested amount, whichever is lesser instantly.

Return on investment: You can consider opting liquid funds instead of bank FDs and savings accounts. They offer better liquidity than FDs since you may have to pay a penalty on breaking an FD before maturity period. In contrast, liquid funds may not charge an exit load if the investments are held for more than 7 days. Also, liquid funds usually offer better return potential than those from your savings account. However, unlike savings accounts, the returns from liquid funds are not fixed and are subject to market risks.

Investment portfolio: Debt funds like liquid funds bring an element of relative stability to a dynamic portfolio. With a liquid fund, you get the added benefit of investing in government securities amongst other securities that otherwise have a high minimum investment requirement for retail investors.

Investing in liquid funds in a low interest rate scenario

Most equity funds come at a high risk with a better return potential. Thus, investors who prefer low-risk investment tend to favour debt funds. The interest rate risk associated with liquid funds is lower as compared to other types of mutual funds. You can consult your financial advisor to make sure that it is suitable for you to invest in liquid funds in the low interest rate scenario.

Why you should invest in Bajaj Finserv Liquid Fund

You can get a relatively better return potential by investing in Bajaj Finserv Liquid Fund than traditional banking products like savings accounts and FDs. However, the returns are subject to market risks. The scheme invests in debt and money market instruments with a maturity period of up to 91 days. It currently falls in the low-to-moderate risk category and offers high liquidity. The good part is that you can start your investment in Bajaj Finserv Liquid Fund with just Rs. 1,000.
In conclusion, liquid funds can be a suitable option in the low interest rate scenarios if investors align their investment with their short-term financial goals. The ‘low risk, high liquidity’ combination makes liquid funds a suitable investment avenue for all types of investors.



Are liquid funds a good choice during declining interest rates?

In falling interest rate scenario, the rates are declining because the fixed income as securities prices are rising. So, in a rallying market, one wants to ideally be invested in such opportunities where return potential can be maximised. For that reason, in the falling interest rates scenario, investment in long term securities tends to be more performance generating.

How do liquid funds perform when interest rates fall?

Since liquid funds have maturities of 91 days or less, they tend to be less affected by falling interest rates compared to longer-term fixed income investments. Their short-term nature and diverse portfolio help reduce the interest rate risk to marginal level. Since they offer relative stability and liquidity, potential returns might be lower during such periods. Prioritize your financial objectives before investing.

What factors to weigh before investing in liquid funds?

When considering liquid funds, assess your investment horizon, risk tolerance, and expected returns. Professional advices are vital for making informed decisions tailored to your financial situation.

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 an 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.