Liquid funds provide a high degree of liquidity and safety of the capital to the investor. Investors with low-risk appetite and looking for low or moderate return can invest in liquid funds. Liquid Funds are a type of debt funds that invests money in short term market instruments for the shorter duration (Usually 3 months).
Liquid funds are like an alternative to saving bank account or one of the best avenues to park your emergency fund. You can withdraw money from liquid fund in one or two days. In this post, we will discuss – What are Liquid Funds? Who should Invest in Liquid Funds? Things to Consider for Liquid Funds and Top 5 Liquid Funds for Investment.
What are Liquid Funds?
Liquid funds are a type of debt mutual funds. Liquid mutual funds invest in money market instruments such as bank fixed deposit, commercial papers, treasury bills, debt securities with a maximum maturity of 91 days. The NAV of these funds is calculated and released 365 days. In all other debt mutual funds, the NAV is computed for business days only.
The liquid fund comes without any restriction on withdrawal. You can withdraw money anytime from this fund. The NAV applicable in this could be previous day NAV. The risk associated with this fund is very low. Another benefit of liquid funds is they do not have any entry or exit load.
Who should Invest in Liquid Funds?
Investors looking for the investment option with higher liquidity and low to medium return can invest in liquid funds. These types of funds could be a good choice for parking your idle money or part of an emergency fund. However, you should not part all your emergency corpus in a liquid fund. The main reason is a redemption of this fund also take one or two days.
A liquid fund can be used to achieve your short-term objectives. You can expect from 6-9% returns from these types of funds.
If you are planning to invest in liquid fund you should consider following factors.
Things to Consider for Liquid Fund
Fund Objective – The first thing you need to check is fund objective. The objective of fund should meet with your financial objective. This type of fund is least risky among all debt funds.
Expected Returns – Another factor to check while investing in liquid fund is expected returns. You can expect 6-9% returns from this fund. This return is greater than 4% returns obtained from saving bank account. However, this return is not guaranteed.
Investment Horizon – Liquid funds are exclusively made for surplus cash over short period of time up to 3 months or so. In case you have investment horizon of 1 year, you can consider investing in ultra-short term funds to get higher returns.
Cost – The liquid fund expense ratio is one of the crucial factors for consideration while investing in liquid fund. The expense ratio of fund should be low. Another factor to consider is entry and exit load associated with this type of fund. Most of the fund do not levy any exit load on redemption. However, you need to verify the same while investing.
Fund History – History of fund house is one of the important factor for consideration while investing in fund. Fund house with very good history of consistent performance 5 to 10 years can be opted for investment.
In addition to fund history and returns, you should also look at the financial ratio of the funds. You need to look at standard deviation, sharp ratio, alpha and beta of fund. A fund with higher deviation in beta is risky compared to other funds. You should also look at the fund with a high sharp ratio where possibility of getting return is higher.
Top 5 Liquid Funds for Investment
Based on various quantitative and qualitative parameters Top 5 Best Liquid Funds for investment are given below. Please note that fund suitable for one may not be suitable for other. You should evaluate fund based on your risk appetite, investment horizon and financial goals.
The best Liquid funds given here are based on performance and other important factors specified above. I have taken last 3 to 5 years returns into account while shortlisting funds.
Liquid funds are the best choice for parking your surplus money for a shorter duration. Due to lack of knowledge about liquid fund people don’t invest in them and keep their surplus money into a savings account. One should understand the benefit offered by Liquid Mutual Funds and invest part of your money in good liquid funds.