Investing in mutual funds is a popular choice among individuals seeking to grow their wealth and achieve financial goals. Among the various types of mutual funds available, liquid funds offer a unique set of advantages. A liquid fund is a type of debt fund that invests in debt and money market securities with a maturity of up to ninety-one days. Liquid mutual funds are known for their high liquidity, safety, and attractive returns. This article will explore the benefits of liquid funds and discuss the various ways investors can invest in them.
What are liquid funds, and what are their features?
Liquid funds are an essential category of mutual funds known for their high liquidity and safety. They invest in short-term debt instruments such as treasury bills, commercial papers, and certificates of deposit, which have a shorter maturity period. Here are some key features of liquid funds:
- Liquidity: As the name suggests, one of the primary advantages of liquid funds is their high liquidity. Investors can redeem their investments at any time, typically within 24 hours on business days, providing quick access to their funds.
- Low risk: Liquid funds invest in short-term securities with a low maturity period, reducing the risk associated with interest rate fluctuations. These funds are considered relatively safe compared to equity or long-term debt funds.
- Stability: Due to their conservative investment approach, liquid funds aim to preserve the capital and generate moderate returns. They are ideal for investors seeking stability and protection of their principal amount.
- No entry or exit load: Liquid funds do not charge any entry load and do not have any exit load after 7 days, making them cost-effective for investors. This means investors can enter or exit the fund without incurring any additional charges.
How to invest in liquid funds?
Investing in liquid funds is a straightforward process, and there are several ways investors can participate in these funds:
- Direct investment with AMCs: Investors can directly invest in liquid funds by visiting the websites or branches of Asset Management Companies (AMCs) and completing the required documentation. This approach allows investors to avoid paying any distributor commissions and benefit from lower expense ratios.
- Online investment platforms: Numerous online investment platforms offer easy access to liquid funds. These platforms provide a user-friendly interface, allowing investors to browse through various funds, compare their performance, and invest seamlessly.
- Demat account: Some liquid funds are available in a dematerialized form, similar to stocks. Investors can invest in these funds through their Demat accounts, making it convenient for those who already have Demat accounts.
- Systematic Investment Plan (SIP): While SIPs are commonly associated with equity funds, some AMCs offer SIP options for liquid funds as well.
The returns offered by liquid funds are generally moderate, but they are considered better than traditional savings accounts or fixed deposits. The average annual returns of liquid funds typically range from 4% to 7%. Liquid mutual funds are less sensitive to market fluctuations due to their short investment horizon, which provides investors with a certain level of predictability in returns.
