Liquid funds are a category of mutual funds that can be liquidated, that is sold off or redeemed, easily. These funds invest primarily in money market instruments such as certificate of deposits, treasury bills, commercial papers and term deposits, which have a maturity of 91 days.
As these assets have low maturity periods, the fund manager of a liquid fund can meet redemption demand from investors without significantly impacting the fund’s overall performance.
What are the benefits of investing in liquid funds?
- No lock-in period
The USP of liquid funds is that it doesn’t have any lock-in period. Unlike a fixed deposit, which has a tenure of 7, 15 or 45 days to 1.5 years and can be as high as 10 years, liquid fund has no mandatory lock-in period. You can keep your capital invested for as long and as short as you want.
- No exit load
A corollary of the point above, you don’t have to pay any exit load when you redeem your liquid fund investments. Thus, you can withdraw or redeem your liquid fund investment as per your convenience.
- Safety of capital
As liquid funds invest in debt market instruments, which are considered safe investments, you can be assured that your capital, or your investment amount, will be safe.
- Better returns
Liquid funds earn higher returns than what your savings bank account can garner.
Coming to the second part of your question, well, honestly, anyone who has significant amount of surplus cash in their bank accounts should invest in a liquid fund. There’s no point keeping the money idle in your bank account when it can earn better returns for you.
However, it wouldn’t hurt to keep some extra cash in your account over and above the amount you need for day-to-day expenses.
If you’re thinking that you shouldn’t invest in liquid funds because you already have some equity investments, then you are wrong. By investing in liquid funds, you are diversifying your investment portfolio, especially in an investment class that guarantees safety of your capital.
Liquid funds are among the best short-term investment options during times of high inflation. This is because the central bank- Reserve Bank of India- typically keeps interest rates high and tightens liquidity, thereby helping liquid funds earn good returns.
There have been instances in the past when liquid fund returns have actually outperformed fixed deposit returns.