How to Invest in Liquid Funds?

by | Oct 29, 2019 | 0 comments

By Author: Shashank Pawar

If you have got some surplus cash with you, leaving it in your bank account may not prove to be the best option. The best way to beat inflation and witness the rise in purchasing power of your cash, liquid funds are a much more efficient option when compared to your good old savings accounts.
In this article, we are going to brief about what is a liquid fund and how to invest in liquid funds.
What is a Liquid Fund?
A liquid fund is an open-ended income scheme that invests in debts and money market schemes like government securities, treasury bills and calls money among them. Liquid funds have a maximum maturity period of 91 days and are immune to risks because they mitigate interest rate volatility risks.
The credit risk or the risk of default is also too low in the case of liquid funds.
How Does liquid fund work?
Several factors contribute to the unique working of liquid funds and they are:-

Unlike other debt funds where Net Asset Value or NAV is calculated only for the business days, NAV for liquid funds is calculated for all 365 days of the year so the NAV value of liquid funds doesn’t fluctuate much overt year.

The units of a liquid fund are allotted as per the Net Asset Value of the previous day if the request is submitted before 2 pm on the following day

Lastly, the request of withdrawal from a liquid fund is processed in the first 24 hours and no kind of penalty is dealt on the withdrawer.

Benefits of investing in Liquid Funds
Liquid fund investment carries many benefits with it, these are as follows:

No Lock-in Periods: As mentioned before, all the withdrawal requests are processed within the first 24 hours

No Exit loads: There is no penalty dealt on exiting a liquid fund before maturity

Low-Interest Risk: There are no major interest rate fluctuation risks because of high liquidity

Taxation: The dividends received on the investment in a liquid fund are taxation free

How to Choose Liquid Funds

Past performance of the fund and the track record of the AMC must be checked

The highest credit rating is AAA, the higher the rating, the lower the risk of a default

The portfolio and the allocation procedure of the scheme you are interested in must be checked

Liquid funds often invest in instruments that mature in a maximum of 91 days this means that the funds with lower maturity period have a high holding of cash funds, which in turn means that the capital gains are less

There are different plans involved like growth plans, daily dividend plans, and weekly dividend plans. You must choose a plan keeping in mind your risk appetite and fund requirement that can help you meet emergency fund requirements and shields you from market volatility.

Conclusion:
Let us consider a scenario where you have to pay a sum for your son’s college fee in August and pay your home loan EMI worth 60,000 as your home loan EMI in September. This means the total money you need is 60 thousand and suppose you have 40 thousand in your bank account since April and you would like to invest it for the short term.

There are different plans involved like growth plans, daily dividend plans, and weekly dividend plans. You must choose a plan keeping in mind your risk appetite and fund requirement that can help you meet emergency fund requirements and shields you from market volatility.

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