An overview of liquid funds

Charlotte Miller

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An overview of liquid funds

A liquid fund is a debt mutual fund that is invested in short-term market investments like government securities, commercial papers, or certificates of deposits. It is normally invested in securities that have a maturity of 91 days. Much like a SIP mutual fund, it is suitable for investors who have excess cash and look to park money for short periods of time, like 1 to 3 months. They are less volatile and pose less risk in comparison to the numerous debt funds. It is because they are invested in highly rated instruments. Taking into consideration that they carry a low level of risk, these forms of funds have been assigned the colour blue, which is as per the codes specified by the SEBI.

For an individual who has extra cash, they can think of parking it in a liquid fund. Rather than parking the money in a fixed account with a bank, liquid funds are bound to generate substantial returns. This can be used as a means to invest in equity funds. 

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The process of investing in liquid funds

An investment in liquid funds is likely to benefit from superior liquidity with a low interest rate risk. It is rated to be one of the best options for individuals and corporates alike. Taking all these points into consideration, liquid funds are a viable alternative to fixed deposits. Most schemes go on to provide redemption options where the funds are deposited back into the account within a day.

An investor has the option to choose from among various types of mutual funds. If you take the performance view, there is not a major difference among them. But for an individual who wishes to figure out how a liquid fund performs, the proper method will be to compare the performance against that of the benchmark along with the peer group.

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The returns and risks of mutual funds

Liquid funds are just like the numerous mutual fund schemes. Most of them invest in securities that come at a price. Ever since the price of the liquid funds india, so too did the net asset value of the fund. But the NAV of a liquid fund does not fluctuate like the other funds.

Based on the rules formulated by SEBI, if a mutual fund tends to mature in less than 60 days, it does not have to be market by market. You just need to include the interest component. What it means is that the interest that is earned via the debt fund during the security tenure is going to be divided by the total interest component by the number of calls so that the security is held. Hence, the price of the security will remain steady. Therefore, the movement of the liquid fund is linear, which is a steady line that grows. But it does not imply that the liquid fund is free from risk.

A liquid fund may invest in scripts that take 91 days to mature.