Unlocking the potential of liquid funds in India

potential of investing in liquid funds
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Investing money wisely is a crucial aspect of financial planning, and liquid funds have emerged as a popular investment avenue for individuals and corporations alike. Liquid funds offer a unique blend of relative stability, liquidity, and potential returns, making them an attractive option for investors looking to optimise their short-term investments.
This article aims to shed light on the potential of liquid funds in India, exploring their significance in the market, advantages, scope, guidelines for investment, and factors to consider when selecting a suitable fund.

Table of contents:

  1. What are liquid funds?
  2. Understanding the significance of liquid mutual funds in the Indian market
  3. Advantages of investing in liquid funds
  4. Exploring the scope of liquid funds in India
  5. Guidelines for liquid fund investments in India
  6. Selecting the right liquid fund: factors to consider
  7. FAQs

What are liquid funds?

Liquid funds are a category of mutual funds that primarily invest in highly liquid and low-risk instruments such as treasury bills, commercial papers, certificates of deposit, and short-term government securities. Unlike other mutual funds, liquid funds have a short maturity period, typically ranging from a few days to a few months. These funds aim to generate relatively stable and less volatile returns by investing in fixed-income instruments with high credit quality.

Understanding the significance of liquid mutual funds in the Indian market

Securities markets are characterised by their volatility and unpredictable nature. In such a scenario, liquid funds can play a significant role in helping investors manage surplus funds efficiently. They offer an avenue to park idle money, providing an alternative to traditional savings accounts. Moreover, liquid funds provide investors with easy access to their funds, with most funds allowing redemption within 24 hours.

Advantages of investing in liquid funds

  • Safety: Liquid funds invest in low-risk instruments, mitigating the impact on capital. The focus on high-quality securities minimises the risk of default, making them a relatively stable investment option.
  • Liquidity: One of the key advantages of liquid funds is their high liquidity. Investors can redeem their investment partially or fully at any time, with the proceeds typically credited to their bank account within one business day. This flexibility enables quick access to funds as per the investor's requirements. Also, 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.
  • Return potential: Although liquid funds prioritise relative stability and liquidity, they also aim to generate better return potential than traditional savings accounts. While the returns may vary, they usually tend to be higher than the prevailing interest rates in the market, making liquid funds an attractive choice for short-term investments. However, liquid funds do not provide fixed returns as they are subject to market volatility unlike savings accounts.

Exploring the scope of liquid funds in India

The introduction of online platforms and mobile applications has made it convenient for investors to invest in liquid funds and manage their portfolios. The ease of transactions, coupled with relatively better return potential than traditional avenues, has attracted many retail investors to explore this investment option.
According to a market analysis, the Assets Under Management (AUM) of liquid funds in India has steadily increased over the past few years.

Guidelines for liquid fund investments in India

SEBI has mandated that liquid funds must maintain a minimum of 20% of their assets in liquid instruments to retain their category status. These liquid instruments include cash, government securities such as G-secs and T-Bills, as well as repos on G-secs. By complying with this requirement, liquid funds ensure a sufficient allocation to highly liquid assets, which enhances their ability to meet redemption demands effectively.
However, SEBI has introduced a mandatory exit load on investors who redeem their investments in liquid funds within seven days. This measure aims to discourage short-term trading and promote stability in funds.

Selecting the right liquid fund: factors to consider

When selecting a liquid fund, investors should consider the following factors:

Objective and risk profile: Understand your investment objective and risk tolerance. Liquid funds aim to provide liquidity and relative stability with moderate returns. They are suitable for short-term investment goals and individuals seeking low-risk investments.
Portfolio composition: Examine the quality of assets held by the fund. Look for funds with a portfolio comprising high-quality securities issued by reliable issuers.
Fund manager expertise: Evaluate the track record and expertise of the fund manager. A good fund manager can effectively navigate market fluctuations and generate consistent returns.
Liquidity and redemption process: Evaluate the ease of redemption in case you need immediate access to your funds. Check if there are any exit loads or restrictions on redemption.
Credit risk: Assess the credit risk associated with the underlying securities held by the liquid funds. Consider funds that invest in highly rated securities to minimise the risk of default.
It's important to conduct thorough research and consult with a financial advisor before making any investment decisions.

Liquid funds have unlocked immense potential in the Indian market, offering investors a liquid and relatively stable investment avenue. Liquid funds are low-risk investment options that come with complete flexibility of redeeming the investment at any point of time. They invest in certificates of deposit, treasury bills, commercial papers, etc., all instruments that mature in less than 91 days. While liquid funds are ideal for a short-term horizon, it is advisable to assess your objectives and risk tolerance before making an investment. You can consider investing in Bajaj Finserv Liquid Fund. Investing in Bajaj Finserv Liquid Fund can help investors meet their short-term investment needs. This scheme aims to provide investors with steady income with the preservation of capital, lower risk, and high liquidity.


How can investors make the most of the potential advantages of investing in liquid funds?

Investors should focus on aspects like fund manager’s expertise, their own risk appetite, and investment objectives that align with their own financial goals to make the most of liquid fund investments.

What are the risks associated with investing in liquid funds?

Typically, these funds are viewed as low risk investing options. However, they are vulnerable to the risk of interest rate fluctuation, credit risk, and market volatility. These funds' short duration makes their risks lower than those of other types of mutual funds.

Can liquid mutual funds be considered a suitable investment option for emergency situations?

Yes, one of the benefits of liquid funds is that these funds can be considered suitable for emergency funds. They are an ideal choice for emergencies due to their accessibility.

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.