Why are liquid mutual funds a must-have in your portfolio?
Making smart investments is the key to building a secure financial future. For this, understanding your risk tolerance is an important step in deciding how and where to invest your money. While some opt for more volatile investments, many investors prioritise liquidity and reduced risk when considering their portfolio. Investing in liquid mutual funds can offer such an opportunity – easy redemption and low volatility with the potential for decent returns.
Liquid funds are debt mutual funds that predominantly invest in high-quality debt securities and money market instruments, including commercial papers, certificates of deposit, and treasury bills that mature in 91 days. Most experienced investors and even financial experts often recommend adding liquid mutual funds to your portfolio whether you are new to investing or looking for diversification. Here are five reasons that explain why.
- You can move the funds anytime and invest in other assets
Liquid mutual funds offer high liquidity with no lock-in period. So, you can redeem your investments whenever you want and move funds as needed for other investments. This flexibility is especially beneficial for those looking to quickly take advantage of fluctuating equity valuations that can result in lucrative returns.
- Offers easy and quick redemption
A liquid fund investment eliminates the need to wait for days or weeks to process your redemption requests. You can expect redemption requests to be processed in one business day or even instantly if the withdrawal does not exceed Rs 50,000 per day per fund allowing for great flexibility and convenience.
- An ideal way to maintain a contingency fund
When faced with job loss or unforeseen circumstances, it is important to plan for a contingency fund. A liquid fund can be an ideal option where you can park your funds and have access to withdraw them in times of need. Moreover, these funds tend to offer higher returns than other savings accounts or fixed deposits because they are invested in debt instruments like government bonds or corporate bonds that offer comparatively better yields.
- Less volatile than equity funds
Liquid funds are a relatively low-risk investment option as they generally invest in short-term debt instruments such as treasury bills and commercial paper. This gives them a different risk profile than equity funds, which can often experience significant volatility depending on the stock market’s performance. With short-term debt securities, your mutual fund portfolio may not experience significant fluctuations in interest rates.
- Most liquid funds don’t have an exit load
Most liquid funds typically do not charge any exit loads if redeemed after seven days and offer growth and dividend payout options. Moreover, you can opt for daily, weekly, or monthly dividends depending on your profile, investment amount, and horizon.
Closing thoughts
With instant redemption, no exit load, and reduced risk as its key features, a liquid fund can be an important addition to a well-rounded portfolio. Not only does it provide stability and protect against volatility, but it can also be a great source of short-term income.
Any surplus cash received can be invested in liquid funds – whether from property sales, salary bonuses, etc. But before investing, be sure to check factors including the credit quality of the underlying securities, fund objective, past returns, and expense ratio. This can help you create a customised mutual fund investment strategy that aligns with your financial goals and risk appetite.