Learning how to invest in liquid mutual funds can be useful for investors who want to put surplus money into a short-term investment option. Liquid mutual funds primarily invest in short-term debt and money-market instruments and are generally designed for investors with short investment horizons.
The investment process is relatively simple, but choosing a suitable scheme and understanding the risks is important before putting your money into any mutual fund.
What Is a Liquid Mutual Fund?
A liquid mutual fund is a type of debt mutual fund that invests in short-term securities. According to the mutual fund categorisation framework, liquid funds invest in securities with a maturity of up to 91 days.
These funds may invest in instruments such as treasury bills, commercial papers, certificates of deposit, and other eligible short-term securities.
Unlike a fixed deposit, liquid mutual funds are market-linked and do not guarantee a fixed return.
How to Invest in Liquid Mutual Funds
Here is a simple step-by-step process for beginners.
Step 1: Understand Your Investment Goal
Before investing, determine why you want to invest the money.
Liquid mutual funds are generally considered for short-term investment and temporary parking of surplus funds. They may not be appropriate for every financial goal.
Consider how long you can keep the money invested and when you may need access to it.
Step 2: Research Suitable Funds
Do not select a liquid mutual fund simply because it has generated a high recent return.
Compare factors such as:
- Investment objective
- Portfolio quality
- Expense ratio
- Risk profile
- Fund size
- Historical performance
- Redemption facilities
Past performance does not guarantee future returns.
Step 3: Check the Fund's Portfolio
Review the securities held by the fund and their credit quality. Understanding the portfolio can give you a better idea of where your money is being invested.
Also check whether the fund's investment strategy matches your short-term requirements.
Step 4: Choose an Investment Platform
You can generally invest through the mutual fund house, registered investment platforms, or other permitted distribution channels.
Complete the required account and KYC formalities before making your investment.
Step 5: Select the Liquid Fund
After comparing suitable schemes, select the fund that matches your investment objective and risk tolerance.
Read the scheme-related documents carefully before investing. Pay attention to the investment objective, risk factors, expenses, and redemption conditions.
Step 6: Enter the Investment Amount
Liquid mutual funds can generally be purchased through a lump-sum investment. Enter the amount you want to invest according to the platform's instructions.
Do not invest money that you immediately need for essential expenses.
Step 7: Review and Confirm
Before confirming the investment, check the fund name, investment amount, applicable option, and other transaction details.
Once the transaction is processed, you will receive units based on the applicable NAV.
How Do You Withdraw Your Money?
When you need your money, you can generally submit a redemption request through the relevant mutual fund platform or fund house.
The amount you receive depends on the applicable NAV and the scheme's redemption and settlement terms.
Some liquid funds may provide instant redemption facilities subject to specific conditions, limits, and eligibility requirements. Always check the current scheme information before relying on such a facility.
Risks to Understand Before Investing
Liquid mutual funds are not risk-free. They can be affected by credit risk, liquidity risk, interest-rate movements, and other market-related factors.
The returns are also not guaranteed. Therefore, investors should not consider a liquid mutual fund identical to a savings account or fixed deposit.
Final Thoughts
Knowing how to invest in liquid mutual funds is only the first step. Choosing an appropriate scheme and understanding its portfolio, costs, liquidity features, taxation, and risks are equally important.
Liquid mutual funds can be considered for certain short-term investment needs, but the right choice depends on your financial goals and risk tolerance. Before investing, review the latest scheme information and make sure the investment fits your overall financial plan.
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