What are Liquid Funds?

Many investors seek avenues to park surplus funds while maintaining liquidity and earning reasonable returns. In such scenarios, liquid funds emerge as a suitable option due to their low/low-to-moderate risk profile and potential for returns. However, understanding how to select an appropriate liquid fund investment is crucial for optimising investments.

This article explores the nuances of liquid fund investments, considerations for choosing them, and sheds light on the Bajaj Finserv Liquid Fund as a viable investment choice.

• Table of contents

1. What are liquid funds?
2. How does a liquid mutual fund work?
3. How to choose a liquid fund for investment?
4. Three important benefits of liquid funds?
5. How to invest in liquid funds?
6. Factors to consider before investing in Liquid Mutual Funds in India

What are liquid funds?

Liquid funds belong to the category of mutual funds that primarily invest in short-term debt instruments. Investments are made in treasury bills, certificates of deposit, commercial papers, and other money market instruments with a maturity of up to 91 days. Thus, liquid funds offer high liquidity and a relatively stable return potential compared to other debt funds due to their short-term nature.

How does a liquid mutual fund work?

So, now that you’re aware of what are liquid funds, let’s have a look at how liquid mutual funds actually work.

1. Pool of money: Several investors put their money into a liquid mutual fund, which is then pooled by the fund manager

2. Investment in short-term debt instruments: The fund manager then invests the pooled money in short term & highly liquid money market instruments with a maturity period of up to 91 days. These instruments provide low-risk, low-return investments that create income for the fund.

3. Income is distributed among investors: The generated income is then distributed among the investors. The income distribution can be through Income Distribution cum Capital Withdrawal (IDCW), or in case of growth option, it will reflect in NAV.

4. Redemption: Investors can redeem their investment easily by placing a redemption request with the fund house.

How to choose a liquid fund for investment?

Fund objective and strategy

Evaluate the fund's objective and investment strategy. Ensure it resonates with your investment objectives, risk appetite, and liquidity goals. Choose a fund that prioritises these goals.

Credit quality and portfolio composition

Assess the credit quality of the fund's portfolio. Look for a well-diversified portfolio with a significant proportion of highly rated securities. A portfolio comprising high-quality assets minimises credit risk.

Expense ratio

Consider the fund's expense ratio. Lower expenses generally result in higher net returns for investors. Compare the expense ratio with peer funds to ensure it remains competitive while maintaining quality.

Historical performance and returns

Review the fund's historical performance to gauge consistency in delivering returns. Past performance offers insights into the fund manager's expertise and the fund's ability to navigate different market conditions. However, it must be noted that past performance may or may not be sustained in the future.

Liquidity and redemption process

Understand the fund's liquidity and redemption process. Assess how quickly funds can be redeemed and credited to your account. Opt for funds offering hassle-free and swift redemption processes.

The reputation of the fund house

Consider the reputation and credibility of the fund house managing the liquid fund. A well-established and reputable fund house is often associated with better management practices and reliability.

Regulatory compliance and transparency

Ensure the fund complies with regulatory norms and follows transparent practices. A fund with clear disclosure and compliance measures inspires investor confidence.

Investor services and support

Evaluate the investor services and support provided by the fund house. Access to customer service and support for queries and concerns is crucial for a smooth investment experience.

Read More: How to invest in liquid funds?

Three important benefits of liquid funds?

A thoughtful investor understands the importance of the balance between returns and risk management. Liquid funds seek to strike this balance well, investing in high-quality, low-risk debt instruments that offer relatively better return potential than a regular savings account or even short-term fixed deposits at a risk higher than savings account and short term fixed deposits. While the returns from liquid funds might not match those from more aggressive investment options, they still provide an avenue for less volatility on capital invested and modest growth opportunity.

The expense ratios of liquid funds tend to be lower compared to most other mutual fund categories, making them an efficient choice for the budget-conscious middle-class investor. The cost savings, combined with the potential for better returns than traditional savings accounts, present a win-win scenario. However, liquid funds are marginally riskier than savings accounts.

1.Liquidity

In the uncertain financial world, liquidity plays a significant role. Liquid funds seek to offer investors the ability to easily redeem their investments with the help of insta redemption facility. This liquidity feature is especially advantageous for the middle-class investor who may need funds on short notice due to unexpected expenses, medical emergencies, or unplanned opportunities. Traditional investment avenues like fixed deposits or bonds often come with lock-in periods, which can be restrictive. Liquid funds, on the other hand, provide a seamless exit route, ensuring that the investor's funds remain readily available whenever needed.

2. Potentially optimal returns with relatively lower risk:

A thoughtful investor understands the importance of the balance between returns and risk management. Liquid funds seek to strike this balance well, investing in high-quality, low-risk debt instruments that offer relatively better return potential than a regular savings account or even short-term fixed deposits at a risk higher than savings account and short term fixed deposits. While the returns from liquid funds might not match those from more aggressive investment options, they still provide an avenue for less volatility on capital invested and modest growth opportunity.

3. Cost effectiveness:

The expense ratios of liquid funds tend to be lower compared to most other mutual fund categories, making them an efficient choice for the budget-conscious middle-class investor. The cost savings, combined with the potential for better returns than traditional savings accounts, present a win-win scenario. However, liquid funds are marginally riskier than savings accounts.

How to invest in liquid funds?

Investing in liquid funds involves a systematic approach that aligns with your financial goals and risk tolerance. Here's a step-by-step guide:

1. Define your risk tolerance and financial goals.
2. Research different liquid funds available in the market.
3. Ensure your Know Your Customer (KYC) compliance is up to date.
4. Choose a reliable investment platform – it could be a distributor, website of the fund house, or a mobile app.
5. Decide the amount you wish to invest and the investment mode – lumpsum or systematic investment plan (SIP).
6. If you decide to invest through an online portal, you must fill out the necessary forms and provide the required documents.
7. Regularly review fund performance, portfolio changes, and macroeconomic trends that might affect the market.

Factors to consider before investing in Liquid Mutual Funds in India

Here are some key factors to consider before investing in liquid funds:

1. Expense ratio: You must check the expense ratio of the fund before investing in it. The expense ratio indicates the amount of money you would be paying to the Asset Management Company as a fee to manage your investments.

2. Credit quality of underlying securities: Liquid mutual funds invest in short-term debt instruments. You must evaluate the credit quality of the underlying instruments to analyse the risk associated with the fund. The higher the credit quality, the lower is the risk of default and vice versa.

3. Liquidity: The most important feature of a liquid fund is that it can be easily redeemed, and thus can help you have instant access to cash, whenever required. Thus, before investing in a liquid fund, you must carefully check the redemption process, the time taken to receive the redemption proceeds, and the maximum amount that can be redeemed in a day.

4. Risk and Return: You must carefully evaluate the risk and return profile of the liquid fund before investing.

To sum it up, a liquid mutual fund can be considered an ideal investment option for a short term investment horizon. It not only allows investors to park their excess funds but also helps in generating reasonable returns.

Bajaj Finserv Liquid Fund aims to provide the investors steady income with the preservation of capital, lower risk, and high liquidity. Individuals, corporates including SMEs, partnership firms, NRIs, charitable trusts, etc., can invest in Bajaj Finserv Liquid Fund.

Conclusion

Choosing a suitable liquid fund investment involves a comprehensive evaluation of the fund's objective, portfolio quality, expense ratio, historical performance, and liquidity. The Bajaj Finserv Liquid Fund offers investors an opportunity to achieve wealth creation, lower risk, and high liquidity through its investment strategy focused on short-term debt instruments. Moreover, using a Compound Interest Calculator can help you understand how your investment may grow over time. By entering the principal amount and interest rate, the calculator can provide projections to assist you in making well-informed investment decisions.

FAQs:

Are liquid funds risk-free?

Liquid funds are relatively low/low-to-moderate risk investments compared to other mutual fund categories due to their investments in short-term securities. However, they are not entirely risk-free. There's minimal credit risk, but interest rate risk and market fluctuations can impact returns.

How much money should I invest in liquid funds?

It is advisable to keep a portion of your emergency funds or short-term savings in liquid funds for easy access and relative stability.

Is Bajaj Finserv Liquid Fund worth investing in?

Bajaj Finserv AMC offers the Bajaj Finserv Liquid Fund, designed to provide a level of income consistent with the objectives of capital preservation, lower risk, and high liquidity. By leveraging its investment strategy, the Bajaj Finserv Liquid Fund aims to maintain a balance between relative stability, liquidity, and potentially consistent returns for investors.

What is Bajaj Finserv Liquid Fund's aim?

Bajaj Finserv Liquid Fund's primary goal is to provide investors with an open-ended liquid scheme that has less volatility, lower risk/low to moderate risk, and high liquidity. It seeks to achieve this objective by primarily investing in money market and debt securities with a maturity period of up to 91 days.

What are the main steps to follow to invest in Bajaj Finserv Liquid Fund

To invest in Bajaj Finserv Liquid Fund, follow these key steps: Determine your investment goals and risk tolerance, ensure KYC (Know Your Customer) compliance, select the plan and option, fill out the application form, make the investment payment, nominate a beneficiary, and monitor your investment. You can also seek the help of a distributor to make an informed investment decision.

What makes liquid funds different from other mutual funds?

Liquid funds primarily invest in short-term debt securities with maturities of up to 91 days. They offer high liquidity, enabling investors to access their funds quickly.

What are the key benefits of investing in liquid funds?

Liquid funds provide relative stability, liquidity, and potentially higher returns than traditional savings accounts at a higher risk than savings accounts . They are a good choice for parking surplus funds or meeting short-term financial goals. However, you must note that unlike savings account, returns for liquid funds aren’t guaranteed.

How quickly can I withdraw my money from a liquid fund?

Liquid funds typically offer same-day or next-day redemption, allowing investors to access their funds quickly without penalties or exit loads. With the insta-redemption facility, you can avail Rs. 50,000 or 90% of the invested amount, whichever is lower, instantly.

Can I use liquid funds for long-term investments?

While liquid funds are designed for short-term needs, some investors use them as a temporary parking place for funds before deploying them into other mutual fund categories, which may offer better growth potential in the long term.

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.