- By Aditya Pratap Singh
- Wed, 10 Apr 2024 11:07 AM (IST)
- Source:JND
Liquid Fund: We frequently find ourselves in a situation where we have a certain extra sum of money, which we must spend on certain things in the coming months. In this situation, we are not comfortable investing it in any stocks since there is a risk involved in it, and we don't want to keep it in fixed deposits due to the lengthy maturity period. As a result, the majority of people put their money in savings accounts, which does not generate much income.
However, if you wish to earn interest like fixed deposit interest on your excess money even in a short-term investment, then Liquid Fund schemes are a good option. They are a sub-category of debt funds and have long been popular among corporates, HNIs, and retail investors due to their high liquidity. A liquid fund has a maturity of just 91 days as it invests in securities with a maturity of no more than the given days. The majority of investors' money is invested in money market alternatives, short-term corporate deposits, and treasuries.
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How Do Liquid Funds Work?
The main aim of liquid funds is to provide investors with a high degree of liquidity and security of their capital. As such, the fund manager invests in high-yielding debt options that mature an average of three months. The allocation is following the investment objective of the fund. This reduces the sensitivity of the fund's returns to interest rate fluctuations and reduces the risk in liquid funds.
No Lock-in Period
The fund value does not fluctuate much. In addition, the maturity of the underlying securities matches the maturity of the portfolio, which helps in providing higher returns. Liquid funds are an excellent option to earn higher returns than investing your money in your savings account. At the same time, the liquid fund also provides liquidity like the savings account of banks as there is no lock-in period in these funds. You can use liquid funds as a regular savings account and earn high returns.
Who should invest in liquid funds?
Liquid funds are a great option for those who have surplus money and are looking for short-term investment instruments. Instead of keeping their money in a savings account, they can invest it in liquid funds. Here, there is a chance of getting double returns as compared to a savings account. Proceeds from performance-based incentives, bonuses, and other relevant gains from the sale of capital assets can be used to invest in this fund. Liquid funds can be used as a medium to invest in equity funds. Initially, you can invest the money in liquid funds and then systematically transfer it to equity funds of your choice over a fixed period.