Liquid funds are known for their ability to invest in highly liquid money market instruments and short-term debt securities, providing investors with high liquidity. These funds primarily invest in instruments like Treasury Bills, Commercial Paper, Certificates of Deposit, and Collateralised Lending and Borrowing Obligations, with residual maturities of up to 91 days.
The main goal of a liquid fund’s manager is to invest in liquid assets with good credit ratings and minimal risk of default. Capital protection takes precedence over returns, with a focus on maintaining a portfolio of high credit quality and low expenses. Liquid funds are popular among retail investors for short-term parking of surplus cash, offering higher post-tax returns, safety of principal, and liquidity.
They are favored for various purposes, such as parking extra cash from bonuses or real estate sales, or for investors undecided about long-term investment options. Some investors use liquid funds to stagger investments into equity mutual funds using Systematic Transfer Plans (STPs), believing it may yield higher returns.
Liquid funds are ideal for investors needing quick access to their money, typically within days or weeks.
For investors with medium-term horizons, short-term debt funds or ultra-short-term debt funds may offer better returns. In 2024, the debt inflows were driven by a significant revival in the fund category, along with other short-duration funds like overnight and money market funds. When choosing a liquid fund, investors should look for consistent performance compared to benchmarks and peer funds.
They should verify past returns and consider opting for direct funds with low expense ratios. While fixed deposits guarantee a fixed return, liquid funds provide historical returns and cannot guarantee future returns.
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