Liquid funds are a kind of debt mutual funds. Debt mutual funds are called liquid funds, which invest in very short-term financial instruments such as treasury bills, government securities, bank certificates of deposits and corporate bills. Most of these instruments are either risk-free or low risk. Liquid funds are open-ended funds that invest in money market instruments for a maturity period of up to 91 days.
Top liquid funds aim to provide a higher amount of liquidity and capital security to the investor. For this purpose, the fund manager invests capital in debt instruments of high credit value.
Benefits of Liquid Fund:
- No lock-in period
- Withdrawals from liquid funds are made within 24 hours of the business day
- Double the returns from the savings account
- No entry and exit load.
Returns from the Liquid Funds:
The returns of liquid funds are twice that of savings accounts. The range of returns from liquid funds is usually 6-7%. Investors themselves start earning profits from the date of investment, thus reducing any yield leakage.
Who should invest in a liquid fund?
If you have a sudden influx of funds, then Liquid Fund is the perfect parking spot. You may get some benefit in a recently received performance bonus or a liquid fund in a savings bank account. You can opt-out of the scheme anytime without an exit load and receive your funds the next day.
Take an example. When you sell a plot or house and plan to buy another home in the next three months, you immediately get a lot of cash in your savings account. Get higher returns than savings accounts; this temporary cash can be deposited into liquid funds for the next three months.
Another example of liquid funds is that you can put your business funds into liquid funds (rotating the funds needed to run the company). Since business funds are usually held in a current account where the interest rate is zero, it is possible to invest this money in a liquid fund. You can redeem the fund within 24 hours as the liquid fund has more liquidity.
Another way to use liquid funds is to invest your lump sum money in liquid funds and choose STP to invest in equity funds of your choice. Usually, when you earn a monthly income, you will go to SIP to invest in an equity fund. But if you get a lump sum at a time, you can choose a liquid fund to park the money. In this way, you’d save yourself from making big bets in equity funds all of a sudden and get the advantage of averaging the value of the rupee.
Conclusion – A liquid fund is a type of debt fund that invests money in securities over a maturity period of fewer than 91 days. Therefore they carry minimal risk. You can find historical returns. As you can see in the list, the top liquid funds are Axis Liquid Fund and L&T Liquid Fund, which have given yields approx. 8% pa
Remember that since it is a form of debt fund, you only get tax benefits if you remain invested for at least three years.
Alternatively, holding funds in FDs with no penalty for premature withdrawals such as Yes Bank may also be considered. The best FD rates can be found through tenants (FD section). Currently, FD yields are 7-7.5 percent.