How Liquid Funds Help You Earn Better Returns Than Savings Accounts

How Liquid Funds Help You Earn Better Returns Than Savings Accounts

Liquid funds are a form of debt funds that invest in short-term assets. As per SEBI standards, these funds should invest in money market securities, as well as debts of up to 91 days. This covers treasury bills, government securities, certificates of deposits, repos or commercial papers. A liquid fund is paid back depending on the value of the securities in the market. Short-term bonds are more stable than long-term bonds hence they have steadier liquid mutual fund returns than other debt funds.

Essential Features of Liquid Mutual Funds for Safe Short-Term Investing

Returns: Even though market conditions can impact them, liquid funds often provide a higher return when you redeem them. Historically, these funds have yielded liquid fund returns of about 7%-9%, which is significantly better than what you would earn in a savings account.

Financial goals: Liquid mutual funds are very useful for building emergency funds. They not only offer better returns than keeping money in bank accounts, but the top liquid funds in India also provide quick and easy access to your money when you need it.

Investment horizon: Liquid debt funds offer you more flexibility regarding how long you want to hold your investment. If you plan to set aside money for emergencies, a longer investment period is advisable. However, if you are looking at liquid funds as a temporary place to keep extra cash until you find a better investment, a shorter investment horizon might be more suitable, depending on your needs.

Costs: Like all mutual funds, liquid funds charge a small fee known as an expense ratio to manage your investments. SEBI has set a maximum limit for this expense ratio at 1.05%.

How Liquid Funds Work?

Liquid Funds raise money that is invested by multiple individuals to create consistent but short-term returns coupled with high liquidity. Managed by professional fund managers, these funds invest pooled money in a diversified mix of short-term debt instruments, which typically carry lower interest rate risk due to their short maturities.

The main aim of the Liquid Mutual Funds is to retain capital and at the same time earn a reasonable return. Fund managers are in the process of monitoring the portfolio and making investment decisions that would help in achieving this purpose. Liquid fund investment is an appropriate choice for investors looking to achieve both stability and liquidity in their investments since the underlying instruments have shorter time frames, thus enabling the investor to withdraw funds within an acceptable time frame.

Who Should Consider Investing in Liquid Mutual Funds and Why?

The people who can start investing in these funds without much hassle are:

• Liquid funds often offer a good return rate, usually much better than what you get from bank deposits, and for a shorter time frame. So, they can be a better option for investors seeking higher liquid mutual fund returns than a bank deposit while keeping risks low.
• As mentioned earlier, the assets in a liquid mutual fund will mature within 91 days. This makes it a solid liquid fund investment choice for those who want to invest for no more than three months.

Top Tips and Factors to Evaluate Liquid Mutual Fund Investments

When looking for the best liquid funds India to invest in, here are some factors to keep in mind:

• Liquid mutual funds are among the least risky options in the mutual fund world, which means the NAV doesn’t change too often. However, there is still a chance for sudden drops in the fund’s net asset value. This can occur due to a sudden drop in the credit rating of the underlying assets and bonds.
• Liquid funds typically offer a higher liquid fund interest rate than a regular savings account. While the returns from these funds aren’t guaranteed, they have historically provided positive results.
• This type of investment is perfect for those looking to invest for a short time, specifically not exceeding 91 days.
• Like all mutual funds, liquid funds charge a fee for managing the investments, known as the expense ratio. However, due to the short holding period, the expense ratio for liquid funds should be relatively low, which is something you should consider.
• If you want to set up an emergency fund, liquid funds can be very useful. Since these funds don’t have a lock-in period, you can easily and quickly withdraw your money.

Advantages: How Liquid Mutual Funds Offer Safe and Flexible Returns

Low risk: Such funds are of a low risk compared with many other mutual funds. They deal in stability across different interest cycles by investing in high-quality securities that can mature up to 91 days.

Low pricing: The top liquid funds in India are cost effective since fund as fund managers take a relativelt passive approach compared  to other debt funds. The expense ratio of most liquid funds is less than 1 per cent, which in turn allows for maximising liquid fund returns to investors.

Short redemption time: The redemption process of the investors is completed by the fund companies in less than one working day. Moreover, these requests can literally be processed in a split second by some Asset Management Companies (AMCs). This is highly efficient because of the high liquidity of the underlying securities in such liquid fund investment schemes.

Flexible investment term: Investors have the freedom to retain their money in a fund on their terms. They are also allowed to withdraw their money in times of emergencies without any exit load after the seventh day from the date of purchase. This qualifies these funds as an excellent alternative for individuals who would desire to have a contingency fund.

Investment choice: Individuals have two investment choices where they can invest their funds in liquid funds either as a lump sum or a Systematic Investment Plan (SIP). Investors on the lump sum method are able to use the whole amount by placing it in a fund simultaneously. Conversely, a short term SIP enables individuals to invest on a pre-determined basis (monthly, quarterly etc.).

Understanding the Risks of Investing in Liquid Mutual Funds

While searching for the best liquid funds India for your investments, it’s important to consider these risks:

• The returns from liquid funds are generally lower compared to other riskier investments (like stocks and bonds). Because of this, there’s a possibility that the return rate might not keep up with inflation in the market. The risk of inflation increases with the bond’s maturity period. However, since liquid funds focus on short-term investments, the inflation risk is minimised.
• Interest rate risk refers to the potential change in a bond’s price due to variations in current interest rates. When interest rates are high, the bond’s value tends to drop, and the opposite is true as well.
• Liquid funds do not come with insurance. Even though money market mutual funds invest in high-quality securities, there is always some level of risk involved. There is no guarantee that you will receive your invested capital back when you decide to redeem your liquid fund units.

When is the Right Time to Invest in Liquid Funds?

Investing in liquid funds will be ideal when you wish to avail of some improved liquid fund returns on cash lying idle within short-term. This money is a wiser alternative to savings accounts because it earns more returns and maintains the same liquidity. Liquid funds are highly suitable for people, who have some financial objectives to be met within these 4–5 months. In addition, in case you opt to have a strategic entry into the equity market, you can employ a Systematic Transfer Plan (STP). Using STP, you can gradually move funds between a liquid fund and a short term SIP in an equity fund. This approach not only increases returns but also helps in dealing with the ups and downs of the market, which makes it a suitable approach to long-term financial planning.

What Are the Returns on Liquid Funds?

The liquid fund returns tend to be low relative to equity or long-term debt funds. The primary investments of these funds are usually short-term debt selections like treasury bills, commercial papers and certificates of deposit, and their income largely depends on the existing liquid fund interest rate. Liquid BeES is an Indian type of exchange-traded fund (ETF) measuring the performance of such liquid securities.