Should you consider liquid funds only for the short term?

Posted On: 06 July 2023

When it comes to wealth generation through mutual funds, an important aspect to consider is the time horizon of your investment. While there are various types of mutual funds available, liquid funds have gained popularity for their flexibility and suitability for short-term needs. In this article, we will explore the concept of liquid funds, understand their investment strategy for short-term goals, and discuss the benefits they offer. However, it is essential to remember that seeking the guidance of a financial advisor or distributor is always recommended for making sound investment decisions. Let's understand what liquid mutual funds are.

What are liquid funds?

Liquid mutual funds are a type of mutual fund that invests primarily in highly liquid and low-risk instruments such as treasury bills, commercial papers, and certificates of deposit. These funds aim to provide investors with a convenient avenue for parking surplus cash for a short duration.

Exploring the flexibility of liquid funds: Suitable for short-term needs

One of the key reasons why individuals invest in liquid funds and consider them suitable for short-term needs is their flexibility. Liquid funds allow investors to enter or exit the fund at any time without incurring any significant exit load. Any investor can exit the liquid fund without exit load after staying invested for 7 days. This flexibility makes them ideal for meeting short-term financial goals that may require access to funds on short notice.
Moreover, liquid funds tend to offer a relatively better return potential compared to traditional savings accounts or fixed deposits. While the returns may vary based on market conditions and the fund's performance, liquid funds aim to provide optimal returns within a short-term investment horizon. However, unlike savings account, the returns from liquid funds are not fixed in nature.

Understanding the investment strategy of liquid funds for short-term goals

To comprehend the investment strategy of liquid funds for short-term goals, it is essential to analyse the underlying instruments in which these funds invest. Liquid funds primarily invest in money market instruments and debt securities with a short maturity period of upto 91 days. These investments ensure liquidity and relative stability while aiming to generate reasonable returns in line with the prevailing market conditions.
Additionally, the investment strategy of liquid funds focuses on maintaining a low average maturity period for the portfolio. By doing so, these funds aim to mitigate interest rate risks and ensure relative stability within the short-term investment window. This strategy allows investors to have peace of mind while knowing that their funds are parked in relatively low-risk avenues.

Benefits of liquid funds in short-term investment horizons

Liquidity: As the name suggests, liquid funds are highly liquid. This means that investors can redeem their investment at any time, typically receiving the proceeds within one business days. Liquid funds provide an option of insta-redemption for resident retail investors up to 50,000 rupees or 90% of amount invested whichever is lower. This feature makes liquid funds suitable for short-term goals that may require immediate access to funds. If investors stay invested for 7 days, they can exit the liquid fund without paying any exit load.
Mitigate impact to Capital: Liquid funds focus on investing in low-risk instruments, aiming to mitigate the impact on the capital invested. While they usually do not provide extravagant returns, the emphasis on less volatility and limited impact on capital invested is crucial for short-term goals where relative stability is paramount.
Low volatility: Since liquid funds primarily invest in short-term debt instruments, they are relatively less volatile compared to equity funds. This characteristic ensures that the value of your investment does not fluctuate significantly, providing a sense of relative stability within the short-term investment horizon.
Diversification: Liquid funds offer diversification benefits by investing in a variety of money market instruments. Diversification helps in spreading the risk associated with investing in a single instrument, providing a more balanced investment approach.

Considering the flexibility and benefits offered by liquid funds, they can be an attractive option for individuals looking to meet their short-term financial goals. However, it is essential to remember that every investment decision should be made after careful consideration of one's financial situation, risk tolerance, and investment objectives. Seeking the guidance of a financial advisor or distributor can provide valuable insights and help in making well-informed investment decisions.

Conclusion:
In conclusion, while liquid funds can serve as an effective tool for short-term investment needs, it is important to conduct thorough research and assess your financial goals. By doing so, you can maximise the potential benefits of liquid funds and make informed choices that align with your financial aspirations. You can consider investing in Bajaj Finserv Liquid Fund to meet your short-term investment needs. This scheme aims to provide the investors steady income with the preservation of capital, lower risk, and high liquidity.

FAQs:

Are there any charges or fees associated with investing in liquid funds?

Yes, like all mutual funds, liquid funds also levy a nominal fee to manage investments. This is known as expense ratio. It is important that investors carefully review the fund’s prospectus or seek advice form a financial expert to make a well-informed decision.

Can I set up systematic investment plans (SIPs) in liquid funds?

While liquid funds are primarily used for short-term investing, it is possible to set up a systematic investment plan (SIP) in these funds. SIPs allow investors to invest a fixed amount at regular intervals, thereby providing them a systematic and disciplined approach to investing.

Can I use liquid funds for emergency fund purposes?

Yes, you can use liquid funds for emergency purposes. Liquid funds provide easy liquidity and relatively stable return potential.

What factors should I consider when selecting a liquid fund?

When selecting a liquid fund, you must take into consideration factors such as the expense ratio, credit quality, expertise of fund manger and the fund’s investment objective. Do not forget to read the scheme’s offer documents for detailed information. You can also seek the help of a financial advisor to make an informed decision.

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.