Today, we are here to talk about Liquid Mutual Funds (an important topic, especially for those who want to invest their money in the least risky option and with easy access to their money.)
Liquid Mutual Fund is a scheme that invests in the short-term bonds and in the government securities schemes. This would be categorically a debt fund.
How Does a Liquid Mutual Fund Work?
According to the rules of Liquid Mutual Funds, the funds hold bonds that mature in 91 days.
Example:
Instead of borrowing funds, governments or sizable organizations oftentimes collect money by issuing bonds. Based on interest rates and tenure, these bonds are invested by fund managers.
When we say liquid funds, they are like savings account or fixed deposits (FD) However, they do provide some distinct benefits, which we will go over in this article.
Advantages of Liquid Mutual Funds
- Liquidity (Instant Withdrawal):
With a Liquid Mutual Fund, you can debit or credit your funds at any time. - No Penalty Charges:
If you decide to close your fund, you won’t have to pay any additional penalty charges. - No Dependency on Tenure for Interest Rates:
In banks, higher interest is earned for longer investment periods. But in Liquid Mutual Funds, the tenure does not affect the interest earned. - Low Fund Management Costs:
Managing a Liquid Mutual Fund incurs a cost of around 0.2% to 0.3%, which is significantly lower compared to other funds.
Disadvantages of Liquid Mutual Funds
- Lack of Insurance Coverage:
Bank deposits are also covered by government insurance up to ₹5 lakh. But Liquid Mutual Funds do not enjoy such protection. Your investment could incur losses if the company or fund behind the investment collapses. - High-Interest Borrowers’ Risk:
Many organizations that can not take loans from banks tap the capital markets at a higher interest rate through Liquid Mutual Funds. So actually evaluate, before buying in, the fiscal well-being of the system.
What to Keep in Mind When Choosing a Liquid Mutual Fund?
- Focus on Safety, Not Just Returns:
While investing in Liquid Mutual Fund, don’t check just return rates. Verify the stability and safety of the company. - Review Payment History:
ALearn how the company paid back in the old days and in present times to predict how it will pay in the future. - Invest in Established Institutions:
Avoid investing in unfamiliar or newly established companies as it could be risky.
Who Should Invest in Liquid Mutual Funds?
- Small Business Owners:
People keeping money in current accounts which do not earn any interest can park their cash in Liquid Mutual Funds and earn some extra profit. - Short-Term Fund Storage:
If you have extra funds that you might need suddenly, store them in a Liquid Fund. It allows easy withdrawals, just like a bank. - Emergency Funds:
Liquid Mutual Funds are an ideal option for emergency reserves. They function like a bank account, offering easy access to your money whenever needed.
Conclusion
Liquid Mutual Funds represent a viable choice for individuals seeking short-term investments with low risk. It is essential to evaluate the financial health and payment track record of the fund before making any investment decisions. Ensure that you have a well-thought-out plan and adequate knowledge before proceeding with any investments.
Invest wisely for your future. We are here to assist you!