Liquid funds are an ideal form of mutual fund investment for people who are interested in short-term investments with low risk. One of the reasons why people tend to invest in liquid funds is because they provide better returns than Fixed Deposits. However, it is also important to keep in mind that they are not as safe as Fixed Deposits. Nevertheless, one can consider them to be the safest debt fund investment out there.
There are several advantages of investing in liquid funds. Let us take a look at the benefits you can derive by investing in liquid mutual funds:
Higher Returns
When put up with the option of investing in FDs or liquid funds, many investors go for the second option. This is because it has been observed for years that the rate of return in fixed deposits has decreased considerably. In our present time, most of the banks are offering 5 to 5.5% returns on FDs. On the other hand, liquid funds are known to provide a steady return that could be anywhere between 7 to 8%. Hence, due to a better returns margin, you would like to put your money in these mutual funds.
Indexation Benefit
A great concept in investment is indexation. When you get the indexation benefit in your shares, what it means is that the rate of inflation is adjusted with your investment. This increases the purchasing price of your investment and as a result, the profit you generate after a certain period of time is reduced to increased expense value on the paper. So, when the tax is levied on your profit, the taxation amount is low due to the decrease in the profit amount. You do not get this benefit in the FDs.
Low Risk
While it is true that liquid funds are not as safe as fixed deposits, they are safe nonetheless. The liquid funds invest in papers that have a maturity period of 91 days. The companies that issue these bonds are usually rated AAA by credit rating agencies. What this implies is that their creditworthiness is top-notch and their risk of defaulting the payment is exceptionally low. So, one can safely invest in these mutual funds without much risk of losing out on your investment money.
High Liquidity
As the name suggests, liquid funds are amongst the most liquid funds. You can easily convert them into cash at any point of time. For the transaction amount to be credited to your account, it takes T+1 day, where T denotes the transaction day. So, if you want to redeem your money and you apply for it on Tuesday, the latest you will get your money credited into your account will be by Wednesday. In many cases, the money gets credited on the same day as well.
Interest Rate Risk
The interest rate keeps on fluctuating each year. But the great thing about liquid funds is that they are a very short-term investment with the maturity period set at 91 days. What this implies is that the fluctuation you will witness in the course of your investment will be almost minimal. That’s why the Net Asset Value (NAV) of these investments does not witness a major shift. So, you can proceed with your investment without the risk of losing out on an expected return.
These are some of the benefits that you can derive from investing in liquid funds. However, you should not invest keeping in mind just the profits. It is equally important that you pay heed to various terms and conditions, as well as the risks that are associated with liquid funds before you proceed any further.
