You might not want to keep excess cash in your bank account if you have it. Liquid funds are much better than your savings accounts and will help you beat inflation.
This article will explain what a liquid funds is and how you can invest in liquid funds.
What’s a Liquid Fund?
Liquid funds are an open-ended income plan that invests in debts or money market schemes such as government securities, Treasury bills and calls money. Liquid funds can mature for up to 91 days. They are also immune from risks due to the fact that they reduce interest rate volatility risks.
Liquid funds also have a low credit risk and default risk.
There are several factors that contribute to liquid fund’s unique operation.
- Contrary to other debt funds, where net asset value or NAV is only calculated for business days. NAV for liquid assets is calculated for all 365 of the year. This ensures that liquid funds’ NAV doesn’t fluctuate too much over the year.
- If the request is received before 2 PM on the next day, the units of a liquid funds will be allotted according to the Net Asset Value of the previous day
- Finally, withdrawal requests from liquid funds are processed within 24 hours. No penalty is assessed for withdrawers.
The benefits of investing in Liquid Funds
Liquid fund investing has many benefits. Here are some of them:
- No lock-in periods: All withdrawal requests are processed within 24 hours.
- No exit charges: Exiting a liquid fund prior to maturity is not subject to any penalty
- High Liquidity: Low Interest Rate Risk: Due to high liquidity, there are no significant interest rate fluctuations risks
- Taxation: Dividends from investments in liquid funds are exempted from tax
How do I choose liquid funds
- It is important to verify the past performance of the fund as well as the track record of AMC.
- AAA is the highest credit rating. The higher the rating, and the lower the chance of default, is the best.
- You must verify the portfolio and allocation process of the scheme that you are interested in.
- Liquid funds invest in instruments that mature within a maximum of 91 calendar days. This means that funds with a shorter maturity period tend to have a higher holding of cash funds which, in turn, means that capital gains are lower.
- There are many plans available, including growth plans, weekly dividend plans, daily and dividend plans. It is important to consider your risk appetite and fund needs when choosing a plan that will help you meet your emergency fund requirements while protecting you from market volatility.
Consider a situation where your son has to pay Rs 2 lakh in college fees in August. In September, you will have to pay Rs 60,000 EMI on your home loan. The total amount you will need is Rs 2 crore 60 thousand. Let’s also assume that you have 2 lakh 40 000 in your bank account from April. You would like to invest this money for the short-term.