Liquid funds belong to the class of debt mutual funds that mainly invest in financial means including fixed deposits, commercial papers, treasury bills, and certificates of deposit within a maturity period of 21 days. The redemption of liquid funds is processed in 24 hours. Since liquid fund invests in fixed income securities that mature in the least period, it possesses the lowest interest risk.
Who should invest?
If you are a person with idle money, then you should invest in a liquid fund. Instead of parking your surplus funds in a savings bank account, you can invest them in good quality liquid funds. A liquid fund is an ideal mean if you are having short term financial goals. Ensuring a 5%-8% returns and also comes with risks related to the market and your fund house.
Things to Consider Before Investing in Liquid Funds
1.Fund Objectives
Considering the least risky nature of the liquid fund comparing with the other types of debt funds prevents the NAV of liquid funds from getting impacted by the underlying asset price fluctuations. liquid funds are not entirely risk-free. This is due to an abrupt decline in the credit rating of the underlying security. Since the maturity period is in the range of 60 days to 91 days the risk factor is relatively low.
2.Returns
5% to 8 % are the average returns range to be expected from a liquid fund. Considering the traditional 2.5% from a normal saving account, a liquid fund is way more profitable with minimum risk.
3.cost
Liquid funds charge a fee to manage your investment called expense ratio. The expense ratio is deducted from the fund like any other mutual fund schemes. 2.25% is the mandated expense ratio by SEBI (The Securities and Exchange Board of India).
4.Investment Period And Financial Objectives
Usually, investments in liquid funds took place with the surplus money over a minimum time frame. In case you don’t need the money within that short time, say 60- 90 days it is better to invest in ultra-short-term funds to get relatively higher returns. In other words, liquid funds are excellent when considering making an emergency fund reserve within the reach. The probability of higher return rates along with the feasibility of pulling the fund back within the limited time period makes the liquid fund a wiser choice.
Assessment of Liquid Funds
1.Financial ratios
Apart from the returns, there is a range of financial ratios available, which can be used to analyze the performance of the fund from different perspectives. For examining the risk-adjusted returns and relative riskiness of fund tools like standard deviation, Sharpe, alpha, and beta ratios can be used.
2.Expense Ratio
Always Choose fund with a lower expense ratio. The expense ratio of the fund indicates the operating efficiency of a mutual fund scheme. It also shows the ratio of your investment used to manage the expenses of the fund. The higher the returns the lower the expense ratio.
3.Returns
These are two important aspects of the liquid fund investment that usually go unnoticed among the new investors. While choosing the fund returns over different time spans of your selection, always go for the funds with a history of consistently outrun the peers. The investing amount, time period and the previous performance of the fund history should be taken into account. The past performance is never indicative of how the fund is going to perform rather providing an impression with the previous performances.
4.Track Record
The track record of your asset management companies(fund house) should be considered before investing. Asset management companies or Fund houses that have a renowned history of consistent performance in the investment domain may be trusted to stay resilient during slumps and market rally. Again this performance should be steady for the past 5 to 10 years record.
Top 10 Liquid Funds in India
| Fund name | 5-year average returns |
| Aditya Birla Sun Life Money Manager Fund Regular Plan-Growth | 7.67% |
| ICICI Prudential Money Market Fund Regular Growth | 7.50% |
| Kotak Money Market Growth | 7.44% |
| UTI Money Market Fund-Discontinued – Regular Plan-Growth | 6.95% |
| Aditya Birla Sun Life Liquid Regular Plan Growth | 6.92% |
| Nippon India Liquid Fund Growth | 6.91% |
| Axis Liquid Fund Growth | 6.91% |
| ICICI Prudential Liquid Fund Growth | 6.88% |
| UTI – Liquid Cash Plan – Regular Plan – Growth Option | 6.87% |
| L&T Liquid Fund Growth Option | 6.87% |
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals.
2 comments
Why do u suggest regular fund rather than direct…?
Because no commission