Benefits Of Investing In Liquid Funds

Different individuals are investing with different mindsets in the market. Some investors prefer to invest in the long-term instrument while some of them prefer to stick with the short-term instrument. Not just that, investors are also focused on the lock-in period of the instrument. Investors who need urgent funds go with liquid mutual funds. Whereas investors who don't need the funds in urgency select the mutual fund with a lock-in period. So if anyone wants to liquidate their invested amount in a short period then liquid funds are considered the best investment for them.

Meaning of Liquid Funds

Liquid funds are a type of mutual fund also known as debt funds. Liquid funds primarily invest funds in fixed-income or money market instruments such as treasury bills, government securities, commercial paper, etc. These funds have a maturity of up to 91 days and investors can withdraw their funds within 24 hours of proceedings. Liquid funds have a lower rate of interest and are ideal for the investor who wants to liquidate their investment quickly.

How do Liquid Funds work?

Liquid funds come with the main objective of providing liquidity to their investor which leads to the protection of capital. This is why the fund manager always prefers to invest in highly liquid instruments. Before investing in liquid funds, fund managers consider some factors which are as follows:

Where to invest - While selecting the investment, the fund manager always chooses to invest in instruments which can be easily liquidated.Net asset value (NAV) - The NAV of liquid funds is not fluctuating more because of its low duration.Withdrawal - Fund managers always prefer the funds which can be typically withdrawn within 24 hours.Maturity - The fund manager always prefers to invest in instruments which can be matured within 3 months or 91 days.

Advantages of Investing in Liquid Funds 

Quickly monetize - Liquid funds can easily monetize as there is no lock-in period.No taxes on dividends - Investors are not taxed at the time of payment of dividends in liquid funds.Entry and exit load - Exit load is nil and there is no load of entry in case of liquid funds.

How to Select the Best Liquid Funds

Before selecting any funds you should consider the following factors which are discussed below:

Expense ratio - Returns in every liquid fund are almost similar. So before investing in any liquid funds, you should consider the expenses ratio attached to the funds. Investors should always prefer funds which have a lower expense ratio compared to other funds.Returns - Since most of the liquid funds come up with the same amount of maturity of 3 months, investors should always consider the liquid funds which have a high return.Size of the fund - These funds prefer by institutional investors and in case there is sudden redemption the size of the fund is impacted adversely. So you should choose the funds with larger assets under management.Diversified portfolio - Investors should select highly diversified funds. Investing in a diversified portfolio will minimise the risk for investors.

Liquid funds are the best option for those who want to liquidate their investment quickly. But before investing in any kind of liquid funds you should consider the risk attached to the investment by doing your research and analysis.