What are Liquid Funds? Should You Invest In Them?

Gilt funds are considered suitable for those that prioritize security above high returns and are seeking to stay invested for longer periods usually 3 years or longer. Historically, over the medium to long term, gilt funds have provided a good balance between capital preservation and reasonable returns. In addition, it offers superior asset quality of the underlying investment in comparison to equity funds and even many debt funds. These work well when markets are plummeting. High gains are provided by interest rate volatility, but the fund is also subject to interest rate risk.

Liquid funds are a type of debt mutual fund that invests in debt securities with residual maturity of 90 days or less. This type of mutual fund primarily investments of this scheme are debt and money market instruments, which include corporate and government bonds, debentures, Certificates of Deposit (CD), Commercial Papers (CP), Treasury Bills (T-Bills), etc.

A majority of these fixed-income securities are held till maturity, that combined with the short maturity of underlying investments makes liquid funds a potentially low volatility investment. As a result, liquid funds are considered ideally suited as a short term investment options by even conservative investors. However, returns from these mutual fund schemes is not guaranteed and dependent on performance of the investments debt/money markets.

Before getting into the benefits and limitations, let us understand a bit more about the meaning of liquid funds. The main aim of a liquid fund is to offer a high degree of liquidity and capital safety to the investor making it an ideal short term investment option. To meet these objectives, the fund manager invests your amount into high quality debt instruments with an average maturity period of up to 90 days.

The short maturity of these investments helps reduce the interest-rate sensitivity of liquid funds and reduces the potential volatility of the investment. As a result, the fund value of liquid mutual funds does not experience a lot of fluctuations, making it a relatively low-risk market-linked investment option. Thus these mutual fund schemes are undoubtedly an excellent option for you to park your idle money while offering returns that are at par with or higher than fixed deposits of comparable tenure.

After understanding what are liquid funds, it is time to look at their key features and benefits. Knowing these details of liquid mutual funds can help investors make an educated decision regarding whether these schemes are a suitable investment for them:

Now that we know what is liquid mutual funds and their key features and benefits, let us take a look at their limitations:

Liquid funds are considered a suitable investment option for those with substantial idle cash and looking for short-term investment options. Thus, liquid funds can be used for short-term parking of funds which may be later used for investment in equity via a systematic transfer plan. Also, this type of investment is also suitable for those who receive windfall gains or got a huge amount of money but have no idea where to invest their surplus funds. Additionally, the combination of low risk and high liquidity of liquid mutual funds also make them suitable for use as a way to keep your emergency funds handy.