What is Liquid Fund: 5 Things to Consider Before Investing in a Liquid Fund

The amount of risk an investor is willing to take with their investments varies from one individual to another. While some are willing to take higher risks with the hopes of earning higher interest on their investment, there are others who are willing to settle with lower interest rates and opt for less risky investment schemes. Irrespective of the investment tool an investor chooses, they should always keep in mind that most investments market is subject to volatility and returns from mutual funds are never guaranteed. 

Liquid funds are a type of mutual funds which offer high liquidity. These funds are usually preferred by those with a short term investment objective. Planning on saving money for that vacation you have been procrastinating because you were always short on budget? Or eyeing to get a two-wheeler to make your daily commute to work less hectic? If you too have goals that surround the above examples or basically, if you have short term financial goals that you want to achieve, you should consider investing in liquid mutual funds. 

In SEBI’s categorization of liquid fund is an “Investment in debt and money market securities with maturity of up to 91 days only.”

The reason liquid funds have gained popularity in the past few years is that they are an excellent choice to park your money for a shorter time period of time.

However, there are certain aspects to keep in mind before investing in a liquid fund. Here are five things to consider before investing in liquid funds:

1. Investment horizon

Liquid funds categorised under debt mutual funds and having investment horizon of security which have maturity of ninety-one days. Because they have such a short investment horizon, there is no lock-in period involved. How much you gain from your investment solely depends on market performance. Your money is invested in assets such as government securities, call money, and treasury bills, among others that have a maximum maturity period of 91 days. As the name suggests, liquid funds offer a high amount of liquidity, and you can redeem your gains in just one working day. So if you are someone who wishes to invest in funds that comes with a short maturity period, liquid funds might be a good investment option.

2. Risk appetite

Before putting your money in any investment scheme, the first question to ask yourself is what type of investor you are? Are you are an aggressive investor who doesn’t mind investing in riskier profiles? Or are you a conservative type who doesn’t mind settling with a low but steady income? An individual’s risk appetite might play an essential role in deciding which type of liquid fund is more suitable for you. Make sure you understand your risk appetite before investing your hard earned money.

3. Financial goal

Without having a defined investment objective, investing not just in mutual funds, but any financial instrument may prove to be unproductive. Hence it is better if an investor is able to identify his/her ultimate financial goal and aligns it with his/her risk appetite, investment horizon and your liabilities in order to try and pick a mutual fund that may cater to their investment requirements.

4. Track performance

Choosing the right investment scheme for wealth creation can get a bit confusing, but make sure that you opt for a liquid fund that follows the same investment strategy as yours. Do some background checks like the scheme’s past performance, its benchmark, the fund size, CRISIL ranking, fund management, etc. Remember that a liquid fund that has proper fund management will have a good track record. But also remember that any scheme’s past performance might not imitate its current or future performance. 

5. Expense ratio

Expense ratio refers to the amount that an investment company levies on investors in order to handle their funds. The expense ratio represents all of the management fees and operating costs of the fund. The expense ratio is calculated by dividing a mutual fund’s operating expenses by the average total dollar value for all the assets within the fund. So investors should make sure that the liquid fund they choose to invest in has a low expense ratio. This will help them in accumulating more money during larger payouts.

Each and every liquid fund adopts a unique investment strategy which caters to investors having different financial goals and monetary needs. Thus, maintaining a diversified investment profile consisting of liquid funds along with other mutual funds is always a better idea. Also, expecting immediate gains from your investments may not be a practical idea. Mutual fund investments might need more time to grow to beat its expected benchmark. Hence, investors need to try and be patient with their investments. 

We hope that you keep all the above notions in mind before investing your hard earned money in any investment scheme.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.