What Is Liquid Fund?
We frequently come into possession of extra cash that must be invested. On the other hand, fixed deposits are not an option since they include a lock-in term that prevents access to the funds. In a case between a bank FD or Liquid fund, a liquid fund might be one of the most practical investing solutions. Unlike savings accounts, which pay just a tiny amount of interest, liquid fund redemption time allows you to receive a higher rate of return on your investment.
In investing jargon, the phrase ‘liquid’ refers to anything as movable as hard currency. Real estate, for example, is one of the most minor ‘liquid’ assets, but a savings deposit is one of the most ‘liquid’ assets. As a result, liquid fund investment is a mutual fund/debt fund with a fewer than 24 hours redemption time. These funds primarily invest in money market products such as commercial papers, CDs, term deposits, and treasury bills.
The lock-in period for liquid money can be as long as three days, with the proceeds being cashed within 24 hours. Some liquid funds have a lock-in period that might last a week or even a month.
One of the distinguishing characteristics of liquid funds is that the fund’s underlying assets have a shorter maturity term, which might be beneficial to the fund management when redemption requests must be satisfied.
Now that we’ve discussed what is liquid mutual fund, let’s go into details about the features.
Given below are the features that liquid funds provide:-
- 1 Day Liquidity –
Liquid fund withdrawals take place quickly, usually within 24 hours.
- No Entry or Exit Loads –
Liquid funds have no entry load and exit loads. Sometimes exit load is charged if redeemed before the lock-in period.
- Lowest Interest Rate Risk –
Interest rate risk defines the possibility of a change in a bond’s price due to a change in prevailing interest rates. Inversely proportional, most bond prices go down when interest rates go up, and bond prices go up when interest rates go down.
Given that liquid fund risk mainly invests in fixed income securities with a short maturity period, they have one of the lowest interest rate risks compared to other debt funds.
- Immediate Liquidity up to 50K –
SEBI has recently mandated that AMC’s should allow instant redemptions of up to Rs. 50,000 from Liquid Funds. Asset management companies (AMCs) will offer an instant saving of Rs 50,000 or 90% of the folio, whichever is lower, in liquid funds.
Some funds that provide instant redemption facilities are listed below:-
- Reliance Liquidity Fund
- DSP Blackrock Liquidity fund.
- Aditya Birla Sun Life Liquid Fund
- SBI Liquid Fund.
- ICICI Prudential Liquid Fund.
- Axis Liquid Fund
- HDFC Liquid Fund
- Lowest Credit Risk –
Unlike typical bank fixed deposits or savings accounts, liquid mutual funds are not insured. Even though money market mutual funds invest in high-quality securities and seek to preserve the value of your investment, the risk is inevitable. There is no guarantee that you will receive the invested capital when redeeming your units.
- No Lock-in Period –
They are known as liquid funds as they have no lock-in period and give you quick access to the cash by redemption.
All investments in liquid funds, like investments in other mutual funds, are made in assets having a market price. The NAV (Net Asset Value) of your mutual funds fluctuates depending on the market price of the securities. On the other hand, instant redemption liquid fund NAV does not fluctuate as much as additional funds’.
SEBI (Securities and Exchange Board of India) states that if security matures within 60 days, it is not required to be marked to market. Only the interest component must be included. Essentially, the amount of interest generated by the debt fund across a security’s duration divides the overall interest component evenly by the number of days the deposit is held. The security’s price will remain stable. As a result, the liquid fund’s NAV will move linearly. It is not to say that liquid money is risk-free.
The fund can invest in scripts with maturities ranging from one to 91 days. Thus, if investments in writing with maturities ranging from 60 to 91 days are made, they must be marked to market depending on their credit rating. If the underlying firms fail to repay the principal and interest, the script’s credit rating will fall along with its market price. If your liquid fund has made investments in such securities, the fund’s NAV will fall as well.
The encashment of funds in liquid funds typically takes only one day. However, thanks to technological advancements, you will soon be able to get all of your money in only a few minutes. However, the maximum amount you can withdraw is fixed at 90% of the value of your portfolio, or Rs.50,000 each day, whichever is less.
Mutual fund Liquid funds are available through various programs such as monthly dividend plans, weekly dividend plans, daily dividend plans, and growth plans. Investors can select a plan that meets their financial needs with ease and liquidity. Retail investors can also invest in direct programs with reduced expense ratios, contributing to better returns.
Mutual Funds are subject to market risks. Including any mutual fund in the publication does not guarantee fund performance or underlying creditworthiness. Before investing, correctly read the mutual fund paperwork. When constructing a mutual fund portfolio, specific investing needs and other considerations must be considered.