What Are Liquid Funds? When and Why to Invest in Them

If you're looking for a short-term option for your funds, but where you still may earn somewhat better returns than a savings account, you might want to consider a liquid fund. Interestingly, they have gained traction among people who want the option to get money out quickly and not have it tied up for years.

Understanding the Basics: What Are Liquid Funds

At their core, liquid mutual funds are a type of debt mutual fund that invests mainly in short-term government securities, treasury bills, and money market instruments. If you are wondering what a liquid fund in a mutual fund is, think of it as a pool where many investors contribute their money, which is then invested in very short-term, low-risk instruments. The idea is to provide better returns than a regular savings account while still allowing you to withdraw your money quickly.

Why Choose a Liquid Fund Investment?

People often use a liquid fund investment when they have surplus money that they might need in a few weeks or months. It could be money parked after receiving a bonus, funds waiting to be used for a big purchase, or even an emergency corpus. These funds usually allow you to redeem your investment and receive the money in your bank account within one working day.

Key reasons why many consider liquid funds in India include:

• Flexibility: You can redeem your money quickly without heavy penalties.
• Low Risk: They generally invest in instruments with very short maturity, reducing market volatility.
• Potentially Better Returns: Historically, returns may be slightly higher than a typical savings account, though not guaranteed.

Comparing Liquid Funds in India with a Savings Account

A lot of people question whether they should keep surplus money in a savings account or in liquid funds in India. Savings accounts come with guaranteed interest and easy access. On the other hand, liquid mutual funds usually pay marginally better returns over the short term.

Just like the savings account, you can withdraw liquid mutual funds immediately as well, but the key distinction is in how the money is invested. Savings accounts pay interest at fixed rates determined by banks, but investments in liquid funds have the potential to fluctuate slightly since they are market-linked. Knowing this difference helps you determine the best option for you.

When to Put Money in Liquid Funds?

Timing matters. Consider parking money in liquid mutual funds when:

• You are saving for a goal a few months away, like a wedding or travel.
• You are setting aside funds for emergencies.
• You have received a lump sum (like a bonus or property sale proceeds) and haven't yet decided how to use it.

How to Get Started?

You can start a liquid fund investment with a Systematic Investment Plan (SIP) of at least ₹500. While many people search online for the best liquid funds to invest, it's important to focus on your own financial goals and risk comfort rather than chasing past performance.

Key Benefits of a Liquid Fund Investment for Short Goals

When you have a short-term goal like paying school fees next quarter or buying new furniture in a few months, a liquid fund investment can be a smart parking spot. These funds focus on very short-term instruments, which reduces risk while keeping your money accessible.

Many people choose liquid mutual funds to keep emergency reserves because they combine flexibility with the potential for slightly better returns than a regular savings account. Remember, returns are not guaranteed, and you must always read all scheme-related documents carefully.

Things to Keep in Mind

• These funds are not completely risk-free; there can still be slight fluctuations.
• They are suitable for short-term needs. For long-term wealth building, other options may work better.
• High returns are not guaranteed.

Conclusion

Liquid funds offer an easy way to park surplus money for short periods with the potential for slightly better returns than a savings account. They provide flexibility and quick access, making them attractive for both new and experienced investors.

For those ready to explore mutual fund options, Indiabulls Securities Limited (formerly Dhani Stocks Limited) provides a platform to start your liquid fund investment journey while ensuring that all regulatory norms are met.

Disclaimers: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.

FAQs

1. Are liquid funds safe for beginners?

They are considered low-risk compared to equity funds, but no mutual fund is risk-free. Always read the scheme documents carefully.

2. Can I lose money in a liquid fund investment?

While rare, slight losses can happen due to market movements or credit risk.

3. How quickly can I access my money?

Generally, within one working day, though this can vary slightly based on the fund and the time you place your redemption request.

4. Is there a minimum amount required?

Yes. For SIPs, the minimum is ₹500, as per SEBI regulations.