Liquid mutual funds – Benefits, risks and returns of liquid funds

Liquid mutual funds, simply known as liquid funds, are open-ended debt funds that invest in debt and money market instruments with a maturity period of up to 91 days. The investment instruments of liquid funds include Certificates of Deposit (CD), commercial papers, treasury bills, government securities and bonds. These funds strive to earn potentially stable returns on investments with relatively minimum risk to the principal amount.
Many Indian investors who prefer to save and invest in fixed-income investment instruments, choose to invest in liquid funds over other mutual funds. This is because liquid funds carry a relatively low / low to moderate risk, offer high liquidity, and generate potentially reasonable returns over a short investment horizon.

Table of Contents

• Who should invest in liquid funds?
• Benefits of investing in liquid funds
• Risks of investing in liquid funds
• Why should you invest in the Bajaj Finserv Liquid Fund?

Who should invest in liquid funds?

You should invest in liquid funds if:

• You are looking for a low-risk investment option.
• You are a new investor getting started with mutual funds.
• You want to get relatively better returns from your money parked in your savings account.
• You have a short investment horizon.
• You prefer high liquidity in mutual funds.
• You want to realise short-term financial goals like funding a vacation, building a contingency fund, buying a home appliance, and so on.

Benefits of investing in liquid funds

These are the liquid fund benefits you should know about if you want to start investing in liquid funds:

High liquidity: Liquid funds are quite easy to liquidate. These open-ended mutual fund schemes allow you to get your money in your account on the same day or the next business day after you place a redemption request. Also, with the insta-redemption facility, you can redeem up to Rs. 50,000 or 90% of the invested amount, whichever is lower, instantly.

Low / Low to moderate risk: Since the investment horizon is short, liquid funds fall under the low/ low-to-moderate risk category on the riskometer. This is probably one of the main reasons why Indian investors prefer to invest in liquid funds.

Relatively stable returns:

Liquid funds do not just offer better liquidity; you can also expect relatively better return potential on liquid funds that those from savings accounts or fixed deposits. However, the risk associated with liquid funds is also higher than that of a savings account or a fixed deposit. Another benefit of investing in liquid funds is that you do not have to pay a penalty if you exit the scheme after 7 days from the date of allotment of your investment, whereas you must pay fees on breaking the FD before its maturity date.

Low investment amount: Since liquid funds invest in government securities, you can opt for liquid funds to participate in investments in government securities at comparatively smaller amounts, often as low as Rs. 1,000.

Risks of investing in liquid funds

Interest rate risk: Liquid funds are susceptible to interest rate change. Bond prices and interest rates are inversely related, with increases in interest rates causing a decline in bond prices. However, the interest rate risk is relatively less for liquid funds since their investment horizon is short i.e., less than or equal to 91 days.

Inflation risk: No investment is completely free from inflation risk including liquid funds. Even if you get reasonable returns from your liquid fund investment, you still lose if inflation is hanging around at a higher mark. This is because of the loss of purchasing power of your money.

Credit risk: Securities that may default bring credit risk to a liquid fund. You can avoid credit risk by choosing a scheme that invests in securities with a high credit rating. The important thing to remember is that you cannot fail-proof any market investment including liquid funds.

Why should you invest in the Bajaj Finserv Liquid Fund?

If you are dissatisfied with the small interest you earn on your savings account or from your FDs, you should consider investing in the Bajaj Finserv Liquid Fund. The scheme invests in debt and money market instruments with a maturity period of up to 91 days. It comes with a low/low-to-moderate risk factor, offers high liquidity, and strives to generate relatively better return potential than traditional savings account at a risk higher than savings account. Moreover, you can get started with your Bajaj Finserv Liquid Fund investment with just Rs. 1,000.

In conclusion, liquid funds offer the blend of low/low to moderate risk, high liquidity, and reasonable returns potential. Before investing, one should make sure to align one’s liquid fund investment with short-term financial goals. Thus, the many benefits of liquid funds make them suitable for all types of investors, even conservative investors who do not want to put their principal amount at a high risk.

FAQs:

What are the key benefits of investing in liquid funds?

Liquid funds offer liquidity, relatively stable returns, and less volatility impact. They serve as a good option for parking surplus cash or meeting short-term financial goals.

What risks should investors be aware of with liquid funds?

Liquid funds carry minimal risks, primarily related to interest rate fluctuations and credit risk and liquidity risk. These risks can impact returns but are generally low.

What kind of returns can I expect from liquid funds?

Liquid funds usually provide relatively better return potential than traditional savings accounts, with yields closely tied to short-term interest rates. However, the returns from liquid funds aren’t fixed and are subject to various risks unlike savings accounts.

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.