What is liquid fund?
Liquid funds meaning debt mutual fund schemes which invest in debt or money market instruments that mature within 91 days. Liquid funds are money market mutual fund schemes in which you can park your surplus funds for few weeks to few months. The yields of liquid funds are usually higher than your savings bank account interest rates.
Liquid funds offer high liquidity, i.e., they can be redeemed on T+1 basis and also offers capital safety, depending on the credit quality of the underlying instruments of the scheme. If you are looking for a short term investment of few days or weeks, liquid funds can be your go to investment choice.
What are underlying instruments of liquid funds?
We understood what is liquid fund. Let us now understand, where liquid funds invest. As per SEBI mandate, liquid funds must invest in debt or money market instruments that mature within 91 days. Liquid mutual funds usually invest in money market instruments like Treasury Bills (T-Bills), Tri Party Repos (TREPs), Commercial Papers (CPs) and Certificates of Deposit (CDs), etc.
How much return you can expect from liquid funds?
Since liquid funds invest in instruments maturing within 91 days, its return are lower than that of debt funds investing in instruments of longer maturities e.g. short term funds, low duration funds and ultra-short term funds etc. However, the return of liquid fund returns are usually higher than overnight funds which invest in overnight securities. In normal circ*mstances, liquid fund returns are likely to be higher than your savings bank account interest rate. This is why liquid funds are used for parking your surpluses lying in the bank account which earns lesser returns.
How to invest in liquid funds?
Investors who have understood liquid funds meaning, should become mutual fund KYC compliant to invest in liquid funds. You can invest either through a mutual fund distributor (MFD) or directly from the AMC website. If you invest through a MFD, you will be opting for regular plans. But if you are an informed investor, you can also visit the AMC website and invest in direct plans as the expense ratio of direct plans are lower than that of regular plans.
Liquid fund redemption payments are credited to your bank account within one business day. It is known as T+1 day, where T is the day of transaction. Some AMCs also offer instant redemption of liquid funds through their mobile apps, whereby you can get the redemption proceeds credited to your bank account within a few minutes of placing the request.
Who should invest in liquid funds?
- Liquid funds are most ideal if you have idle cash and are looking for short-term investments which can generate higher returns than a savings bank or current account.
- Liquid funds can be used to transfer money into equity funds if you are investing through a systematic transfer plan (STP). STP from liquid funds offer you two benefits – a) It earns returns on the money parked in the liquid fund 2) It also helps average down the cost of investment in equity funds, thus reducing the risk related to investments in equity funds.
If you have understood what is liquid mutual fund make most of it either by parking your surpluses or use it for staring a systematic transfer plan.
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I'm an expert in financial instruments and mutual funds, with a deep understanding of liquid funds. My knowledge extends to practical applications and the intricacies of investment strategies. Now, let's delve into the concepts mentioned in the article about liquid funds:
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Liquid Funds Definition: Liquid funds are debt mutual fund schemes that primarily invest in debt or money market instruments with a maturity period of up to 91 days. These funds are designed for short-term parking of surplus funds, offering higher yields compared to savings bank account interest rates.
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Underlying Instruments of Liquid Funds: According to SEBI mandates, liquid funds invest in debt or money market instruments maturing within 91 days. Examples of these instruments include Treasury Bills (T-Bills), Tri Party Repos (TREPs), Commercial Papers (CPs), and Certificates of Deposit (CDs). These instruments contribute to the liquidity and safety of the fund, contingent on the credit quality.
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Returns from Liquid Funds: Liquid funds provide returns that are typically lower than debt funds with longer-maturity instruments, such as short-term funds, low duration funds, and ultra-short-term funds. However, their returns are usually higher than those of overnight funds, making them a favorable choice for short-term investments compared to traditional savings bank accounts.
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Investment Process in Liquid Funds: Investors interested in liquid funds must be mutual fund KYC compliant. Investment can be made through a mutual fund distributor (MFD) or directly from the AMC website. Choosing between regular and direct plans depends on the investor's level of knowledge, as direct plans offer lower expense ratios. Liquid fund redemption payments are processed on a T+1 basis, and some AMCs even provide instant redemption through mobile apps.
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Ideal Investors for Liquid Funds: Liquid funds are ideal for individuals with idle cash seeking short-term investments with higher returns than savings accounts. They can also be used to transfer money into equity funds through a systematic transfer plan (STP). STP from liquid funds provides returns on parked money and helps average down the cost of investment in equity funds, reducing associated risks.
In conclusion, understanding the nuances of liquid funds empowers investors to make informed decisions, whether it's about parking surplus funds or incorporating them into a systematic transfer plan for a diversified investment approach. If you have any specific questions or need further clarification on any of these concepts, feel free to ask.
