What are the advantages of investing in liquid mutual funds?

Liquid funds are basically debt mutual fund schemes. Investors can use it if they have excess cash and think they might need the cash in a few days or weeks or months. If an investor wishes to invest a large sum in equity fund, but want to stagger the investments over a period, an investor can put their funds in liquid funds and enroll for a systematic transfer plan (STP) where an investor will invest a fixed sum from the liquid fund to an equity fund each month. If an investor is looking for tax saving funds, they can opt for ELSS mutual funds. Liquid funds can become a beneficial investment option. Liquid funds are a type of mutual fund/debt fund where the redemption period for the funds are less than 24 hours. These funds make investments mainly in the money market instruments like commercial papers, certificate of deposits, term deposits etc. The lock-period for liquid funds can go up to a maximum of 3 days and the encashment of the proceeds will take place within 24 hours. Some liquid funds may have a lock-in period of up to a week or even a month.

One of the characteristic features of liquid mutual funds is that the underlying assets of the fund have a low maturity period that can be helpful for a fund manager when the redemption demands have to be met. Liquid funds mostly take a single day for processing the encashment of funds. Because of the advancement in technology, an investor gets all the money in just a few minutes. There is a limit on the amount that can be taken out, that is set at 90% of the portfolio’s value of Rs. 50,000 per day or whichever is less. Investors can go for different plans like monthly dividend plans, weekly dividend plans and growth plans offer liquid funds.

Some of the advantages of investing in liquid funds:

  1. Least risk:

Liquid funds carry the least level of risk and they are the least volatile among all the types of debt mutual funds due to their extremely short maturity period and the fact that these funds mostly invest in instruments with high credit ratings.

  1. High liquidity:

Liquid funds provide an unmatched liquidity to the investors since the money remains invested for a short period of time. Hence, these funds allow investors to redeem their investments as and when required. After redemption, the proceeds from liquid funds will be credited to the investors account in 1 or 2 days.

  1. Instant redemption:

Some liquid funds offer the facility of instant redemption which means placing the redemption order online, and they will immediately get their proceeds in the bank account. However, market regulator SEBI has capped eth amount of instant redemption to Rs. 50,000 or 90% of the portfolio value, whichever is lower. Some mutual funds have linked liquid funds to debit cards, making it convenient for the investors to make withdrawals.

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