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LIQUID FUND

Where do you invest your salary when you receive?

Do you spend the entire amount of your salary as soon as you receive?

Till you spend your salary where does your money lies.

Do you know?

If you park some portion of your salary in liquid funds till you actually require, the income earned from such investment will take care of some of your expenses.

Liquid investment means any investment that can be easily converted into cash without having a significant impact on its value.

What is Liquid Fund?

Liquid Funds are open ended debt funds that invests in high-credit quality fixed income instruments with short term maturity.  These debt securities comprise money market instruments such as government treasury bills, commercial paper, corporate bonds, certificates of deposits with maturity period up to 91 days.

How do liquid funds work?

Net Asset Value of liquid fund doesn’t fluctuate much as other funds.

Units are allotted as per previous day’s Net Asset Value if application is received before 1 p.m.

Withdrawal requests are processed in 24 hrs.

For regular transactions, with click of a button you can transact for purchase, switch or redemption.

What are the benefits of investing in liquid fund?

1.Higher Returns than Savings Account/Fixed Deposits:

Liquid funds are gaining popularity amongst the retail investors because of their ability to deliver higher returns when compared to investment in Bank Fixed Deposits or Savings Account. Also, their high liquidity makes them a better alternative to Savings Account, given that the returns are comparatively higher for liquid funds.

There is no drop in investment value.

2. No lock-in period: 

Withdrawals from liquid funds are processed within 24 hours on business days.

3. No entry and exit load: 

Unlike Fixed deposits, there is no penalty for exiting or breaking them.

4. Taxation:

Tax benefit compared to savings account and fixed deposit. Indexation benefit if withdrawn after 3 years.

Diversification: Risk is divided in Liquid Funds due to investments in various Corporates and government Securities.

Is there any Risk associated with Liquid Fund?

Although liquid funds are not entirely risk-free, however, they are low risk-low returns and less volatile instruments. As they invest predominantly in debt instruments, they are subject to interest rate risk and credit risk. A change in the prevailing interest rates may cause a difference in the price of the debt instruments.

Interest Risk

A jump in yields causes prices of bonds to fall because of which most debt funds suffer. When the interest rates rise, the bond prices fall, and when interest rates fall, the bond prices rise. The bond’s yield on a price curve is steeper as the duration of the debt instrument increases.

Credit Risk

Liquid funds also invest in non-government debt like commercial papers, corporate bonds, certificate of deposits among other instruments. If any bond or commercial paper, fails to honor the repayment, the instrument will be downgraded. When the creditworthiness of the issuer is reduced, it has a bearing on the bond price too. Downgrading of the issuer will lead to a fall in bond prices which will, in turn, affect the fund’s net asset value.

Putting money in a fixed deposit may serve the purpose, but only to a limited extent. One of the big benefits of a fixed deposit is the safety. At the same time, one of the limitations of fixed deposit is often ignored, the money can be parked for a fixed period only, there is no flexibility regarding the period of parking. That is where liquid mutual funds could be considered.

Admin- Rajen Gala

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