Effective management of surplus capital is a common challenge faced by individuals, families, and businesses. Keeping excess funds stagnant in a traditional savings account could hamper the objective of wealth creation. Liquid funds could be a solution here as they offer liquidity, safety, and competitive interest rates.
What are liquid funds?
Liquid funds are mutual funds that primarily invest in high-grade short-term debt and money market securities with maturities typically not exceeding 91 days. The underlying securities are treasury bills, commercial papers, certificates of deposit, and other money market securities. Because of their short tenures and high credit quality, liquid funds are liquid and relatively safe, making them an ideal fit for parking surplus cash for very short intervals.
Why invest in liquid funds for surplus cash?
Investing in liquid funds can have multiple benefits:
- Higher liquidity
When comparing liquid funds to fixed deposits or other short-term investments, they have the advantage of quick access. Redemption in liquid funds is typically processed in one business day, with instant redemption available in many funds up to specified limits. There is generally no lock-in period, ensuring immediate withdrawals if needed.
- Competitive liquid fund returns
Liquid funds have historically offered returns that range from 5-7%, comparatively better than many savings accounts’ rates. This ensures that your money works for you, which typically isn’t possible when depositing money in savings accounts.
- Principal safety and low risk
Liquid fundinvestment is primarily about safeguarding your principal. By investing in high-quality, short-term securities, these funds reduce the risks typically associated with market and interest rate fluctuations. While not entirely risk-free, they are considered relatively safer options. For investors looking to park their excess money in a low-risk yet income-generating avenue, liquid funds are a sensible choice.
- Convenience of investment in a liquid fund
Investing in liquid funds is pretty straightforward. Most platforms and fund houses allow investors to register quickly, complete a simple Know-Your-Customer (KYC) process, and begin with an initial investment as low as ₹500. Online access makes it easy to track your holdings, withdraw, or add more money in real time, offering a seamless experience.
Strategic use of liquid funds
- Short-term parking: Suitable for temporarily holding funds received through bonuses, asset sales, or windfalls before allocating them to long-term investments.
- Staggered investments: Can be used as a staging ground for systematic transfers into equity mutual funds, helping to average out investment costs.
- Emergency reserves: Strong liquidity and relative stability make liquid funds a good fit for maintaining emergency cash reserves.
Conclusion
Investing in liquid funds is not just about earning higher returns; it is about managing excess liquidity effectively. With attractive potential returns, strong liquidity, relative safety, and convenient online access, liquid funds help put your surplus money to work, ensuring that every rupee contributes, even while waiting for its next purpose.
Discalimer: This content is for informational purposes only and does not constitute financial, legal, or investment advice. Readers should verify information independently or consult a qualified professional. The publisher is not liable for any actions taken based on this content.”
