Sunday, December 19, 2021

Introduction to Liquid Funds

Among different types of mutual funds available in the market, liquid funds are another kind of mutual funds. As the name suggests, these are the funds which are highly liquid and invest the corpus in liquid assets such as money market instruments and debt securities with short maturity periods. Liquid funds are considerably safer than the equities.

Liquid funds invest in in liquid assets like Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) etc. These financial instruments have short term maturities ranging from a few days to less than one year. These financial instruments generate optimal returns while maintaining safety and high liquidity. Normally the redemption requests in these liquid funds are processed within one working (T+1) day.

The fund managers of liquid funds invest only into liquid investments which have good credit rating with very low possibilities of defaults. In case of liquid funds, returns are not prime motive but the protection of capital. These funds tried to provide a return above the prevailing inflation rate in the market. So basically, these liquid funds in vague terms can be said to a safe hedge against inflation.

Liquid funds offer low expense ratios and overall a good and quality portfolio which high credit ratings along with very high liquidity and return normally above the prevailing inflation which is always higher than the saving bank accounts. Investors can withdraw their money at any time.

Liquid funds could be a preferred avenue of investment for the investors who want to park their money for short periods of time typically 1 day to 3 months. Many equity investors use liquid funds to stagger their investments into equity mutual funds using the Systematic Transfer Plan (STP), as they believe that this method could yield higher returns.

After a certain period initial period liquid funds typically do not charge any exit loads. Liquid funds offer growth and dividend options to the investors in their schemes. Within dividend option, investors can choose their periodicity ranging from daily, weekly or monthly dividends depending on their investment horizon and investment amount.

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