What is liquid funds : we often hear about liquid funds. Such as is liquid fund better than fixed deposits? Are liquid funds safe? Is it right to invest in liquid funds? How much do liquid funds return? In this article all the above questions and other queries about liquid funds are discussed clearly.
What is liquid funds?
At first let’s discuss about what is liquid funds? Liquid fund is one type of mutual fund. When the word ‘mutual fund’ comes to our brain we relate it with stock market,equities and think that mutual fund invests the fund in stock market. But here liquid fund is quite different from mutual funds. Liquid funds are the Debt funds. It means that liquid funds invest the fund in bond, government securities,debenture etc not in stock market.
All these are the debt instruments that return a fixed percentage. Think if any company wants to pick money from stock market then the company will say that please subscribe our bond or debenture and in return of your fund we will give you P% annual fixed interest with your fund. Liquid funds invest in this type of bond or debt instruments. Now discuss about the reason behind the name of liquid funds. The reason behind this name is that liquid fund invest in short term bond or debt instruments.
Brief description What is liquid funds?
Liquid funds can invest in that instruments that have short term maturity plan of or or before about 91 days. Explain it with an example. If any company needs short time loan for 91 days or less then the company will say that we release a bond. Please subscribe the bond and take the fund with a fixed percentage interest after 3 months. The debt instruments that help to collect the fund for 1,2 or 3 months are invested by liquid funds.
it does not mean that you can only invest in liquid funds for 91 days or less. You can invest in liquid funds as much as that time you wish to invest. Because after a 91 days maturity plan fund manager invest the fund again in new 91 days maturity bond. So you can be invested in liquid funds years after years and fund manager manage the fund on your behalf.
So you have no maturity period because you can exit from it anytime. The name ‘liquid fund’ is also selected for that you can quit from it anytime. If you exit from it before seven days of after investing the fund then you have to pay a charge to fund manager. After seven days of investing you can exit anytime.
What is liquid funds vs What is fixed deposits?
Now it is the time to compare liquid funds with fixed deposits or FDs on the basis of risks,returns and flexibility. Nowdays the return of FDs is between 6% to 8% (depend on the bank,bank type like small finance bank,housing bank etc.). And the return of liquid funds is about same. According to return parametre liquid funds and fixed deposits are same.
Now comare the two on the basis of risks. If you deposit money in reputed nationalize bank then it is sure that your money is about safe or risk free or zero risk and not drowning in future. From april month 5 lakh insurance can be available with fixed deposits and savings. If the money will drown then insurance company pay your money. You can assume that your money is about safe and secure in reputed and nationalise bank and you will get the returns that the bank promise to pay.
And the returns of fixed deposits are not fluctuate and for short term it is impossible. In liquid funds risk is zero such as fixed deposits but returns are not fixed. Return is fluctuating for liquid funds. It is depend on the bond where liquid fund invests. Because if debt instruments do not return the profit to liquid funds then liquid fund can not return the profit for your money.
But it is assume that risk is low in it because the maturity period of this fund is only for one,two or three months. Since the liquid funds invest in short term bond or debt instruments therefore the risks in liquid funds are few. it is quite easy to consider that the company or debt instruments can return after short period than the long period of time.
Since liquid fund invests in debt instruments therefore it have low risk but it is not risk free such as fixed deposits. And the returns of liquid funds are fluctuating and the returns of it often is between 6% to 8%.
If the risk in liquid funds is more than fixed deposits and the return is similiar then why do people invest in liquid funds? What is the advantage of liquid funds? Liquid funds have two advantages. The two advantages are higher and withdrawal flexibility. You can invest in liquid funds or withdraw your money from liquid funds anytime of a year.
But in fixed deposits there is no flexibility. You have to invest a particular amount in one time or deposit money on recurring bases. But in liquid funds if you have money then either invest or do not invest. It is depend on you. But it is not possible for fixed deposits. It have no withdrawal flexibility.
If you do one year fixed deposits then you can not withdraw money before one year and if you break fixed deposits then the bank make penalty on your return. But in liquid funds if you want to withdraw your money amid 7 days of investing then you have to pay a little amount but from 8 days of investing you can withdraw your money anytime.
No charges are applicable here and full flexibility is available. If you need money emergency or you don’t know when you need money such as after one,two or six months later then in this case liquid funds are better than fixed deposits because you know you can withdraw money anytime.
The return of Fixed Deposits and the flexibility of liquid funds are available in Autoswipe. Briefly autoswipe is a feature that returns interest like a fixed deposits after a threshold on savings account. Imagine you deal autoswipe after 50000 rupees with bank. And if you have more than 50000 rupees on your savings account then the extra rupees is autoswipe in fixed deposits and you will get the return like fixed deposits. You can withdraw the money anytime or debit card payment or atm withdrawing etc. You can get thee return of FDs and the flexibility of savings account in autoswipe that few bank provide.
what is liquid funds vs what is autoswipe? (Comparison)
Then what is better between liquid funds and autoswipe? And why people deposit money in liquid funds despite having autoswipe? Now compare them. First autoswipe is not available on all banks.
So you have an account on the bank that does not provide autoswipe then you can invest in liquid funds. Second interest rate in short time autoswipe is lower than the interest rate of fixed deposits. Third if you have not discipline to save your money on savings account or you spend money using atm or debit card then liquid funds is the best option.
Liquid funds helps to maintain discipline and give the flexibility of savings account and the returns of fixed deposits. So liquid funds may be best option but it is no full risk free. It have low risk.
Now how you select right the liquid funds? It becomes our habit that we pick the stock observing returns. But it may dangerous if you do this when you select liquid funds. Because the bad positioning companies promise to give high returns since bank or others do not give loan to the company.
Liquid funds can give high returns taking high risks. But the main purpose of the liquid funds is to safely store the money. Suppose for high return if liquid fund invests in BB or BBB rated companies then the fund can generate high returns but if any company fails to run their programme then you loose your capital free. So purpose of liquid funds is never high return.
If you want high return then invest in equity mutual fund. So don’t choose Liquid funds on the basis of return. Before invest in liquid fund you should examine that the fund is invested in goverment securities or AAA rated companies that are safe and do not make payment default.
You can get all the data from the mutual fund’s website. And you come to know how much money of the total fund is invested in goverment securities and AAA rated companies.
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Best wishes to invest.
FAQ about what is liquid funds?
what is liquid funds?
Liquid fund is one type of mutual fund. When the word ‘mutual fund’ comes to our brain we relate it with stock market,equities and think that mutual fund invests the fund in stock market.
what is liquid funds vs what is autoswipe? (Comparison)
Then what is better between liquid funds and autoswipe? And why people deposit money in liquid funds despite having autoswipe? Now compare them. First autoswipe is not available on all banks. So you have an account on the bank that does not provide autoswipe then you can invest in liquid funds.