Over the years, the category of debt mutual funds has evolved. It is classified into distinct subcategories depending on their maturity period and the kind of underlying instruments and securities. Within the debt mutual fund category, the liquid fund is considered a short-term investment instrument for retail investors owing to its provision of high liquidity and returns.
What are liquid mutual funds?
This debt mutual fund type invests in debt securities with a maturity period of not more than 91 days. Liquid fund mostly invests in short-term corporate securities, money market instruments, and treasury bills. Such tools allow you to earn higher returns than a basic savings account or short-term recurring or fixed deposit. They offer minimal risk and zero compromise on liquidity. Liquid fund redemption is generally credited to your saving account within one working day.
However, while liquidity is an important aspect, it is not the major factor for the increase in the popularity of liquid fund investment. The safety they offer makes them a preferred financial investment option for retail investors to invest in for their exigency fund or short-term financial goals. Compared to other debt mutual funds, such mutual funds are considerably less sensitive to rate of interest fluctuation owing to their mandate to invest in securities with a maturity term of around three months. Despite the involvement of credit risk, there have been minimal instances of any default reported, as mutual funds generally invest in instruments with a high credit rating.
Here are some important benefits of making liquid mutual fund investments –
Short tenure –
Liquid mutual funds make investments in short-term fixed-income securities. Unlike equity mutual funds focused on long-term investments, such funds come with a short-term maturity period and are prudent alternatives to bank fixed deposits and recurring deposits. They generally provide a higher return than FDs and have a higher liquidity feature. Owing to these two benefits, the instrument is considered best for forming an exigency fund for unanticipated exigencies and short-term financial goals.
Debt mutual funds are low-risk financial instruments as they are linked to the market. However, they hold minimal interest risks. While long-term debt mutual funds may be riskier, liquid funds are the safest investment option as they have a maturity tenure of up to 91 days. Liquid mutual funds owing to their investment in short-term securities, have lower risks. Additionally, they even invest in money market securities that are highly rated, which further reduces the risk levels.
Zero lock-in –
While liquid mutual funds have a maturity period of just 91 days, there is no lock-in; hence, unit redemption is simple. As an investor, you can liquidate the investment in liquid funds whenever you want, as per your need. A few liquid mutual funds permit instant withdrawal of up to a specific amount. There’s zero exit load on the liquid mutual fund after seven days, while there’s a penalty levied on FD’s premature withdrawal. This is a crucial benefit that liquid mutual funds have over FDs.
To conclude, liquid mutual fund investment is an excellent alternative solution to saving bank accounts and fixed deposits, as they provide superior returns while offering high liquidity. However, if you are confused with the monthly contribution you must make to achieve a specific corpus, then you must use an online SIP calculator.