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What Are Liquid Mutual Funds?

By Author: Swarali Chavan
Total Articles: 37

Liquid mutual funds are a debt mutual fund scheme. Investors can use liquid funds if they have some excess amount of cash and they might want the cash in a few days, weeks or months. If they wish to invest a large sum in an equity fund, but want to extend the investments over a period, then the investors can invest their money in liquid funds and opt for a systematic transfer plan where the investor will invest a fixed sum from their liquid fund to an equity fund every month. Many financial planners are advising investors to use liquid funds short-term funds as a substitute for earning higher returns. Liquid mutual fund are simply debt mutual funds which invest the money of the investor’s in very short-term market instruments like treasury bills, government securities and call money which hold least amount of risk.

Liquid funds will invest in securities which have a market price, just like every other mutual fund scheme. As the market price of the securities fluctuate, so does the mutual fund’s net asset value. But a liquid funds net asset value does not go up or down as much as other funds. Through liquid mutual funds, the investor’s money is invested in short-term market instruments like treasury bills, government securities and call money. Liquid funds can be invested in instruments until their maturity, they are generally used by liquid funds for parking their money for short periods of time.

Liquid funds can also be used when the investor has a sudden influx of cash and use the excess cash for investing for earning higher profits. Generally, a lot of equity investors use liquid funds to stagger their investments into equity mutual funds by using the systematic transfer plan as this method may yield higher returns. Liquid mutual funds will provide you the money in less time. Liquid mutual funds are less risky as compared to short-term fund due to lower maturity period. Liquid funds are better in terms of liquidity.

Benefits of liquid funds:

1. Least risk:
Liquid funds have the least level of risk and are least volatile among all the types of debt mutual funds because of their short maturity period and the fact that these funds will mostly invest in instruments with high credit ratings.

2. High liquidity:
Liquid funds will provide an unmatched liquidity to their investors as the money will be still invested for the short period of time. Through these funds, the investors can redeem their investments whenever they wish to. On redemption, the proceeds from the liquid funds will be credited to the investors account within 1 or 2 days.

3. Instant redemption:
Some of the liquid mutual funds offer instant redemption, this means that on placing a redemption order online, the investor will get the proceeds directly in their bank account.

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