Liquid Fund – a NEW FD?

Liquid Funds

FIXED DEPOSITS

Usually a good way to earn fixed income passively. Will get a certain amount of interest rate when you give your money to bank for a certain period of time.

Usually FD returns would be around 5-6.5% per annum. But are these can help us to beat the long term inflation which is considered as 4% per annum generally.

FD

So basically we are earning a rate of 1-1.5% per annum. Further you loose based on your tax slab. Now you may feel that we are not earning much. Exactly let’s see the pros and cons of FD.

Pros:

  • No risk (very negligible)
  • Fixed amount of return
  • Goal oriented ( can be very useful to kill your urges and save a certain amount of money)
  • Very known saving instrument

Cons:

  • Low liquidity ( money locked for a certain period )
  • Relatively low returns.
  • Income earned on FD is taxable ( not known to many)
Worried about the decreasing interest rates?

Thinking of how to beat the inflation passively?

So here’s the way to earn fixed income with very low risk compared to stock market. That’s Liquid Fund.

Liquid Fund

But wait….

  • Whats liquid fund?
  • Will my money be safe?
  • How will liquid fund make money ?
  • Are the returns guaranteed like FD?
  • What if they loose all my money?
  • When to choose liquid funds?

There are many questions might run in you mind right now. That’s obvious anyway. Even me, when I heard of liquid fund for the first time had most of this questions in my head.

But don’t worry, your money will be safe as FD. Let me answer you, all the questions one by one.

What is liquid fund?

Liquid fund is a type of mutual fund that invest in Securities with a residual maturity upto 90 days.

Assets invested in liquid funds are not tied up for a long period. As these don’t have any lock in period like FD.

Will my money be safe?

Absolutely yes, as Liquid funds can invest only in listed commercial paper, and they have an overall exposure limit of 20% in a sector. They are not permitted to invest in risky assets as defined by SEBI norms. These norms aim to contain credit risk in the liquid fund portfolio.

How will Liquid funds make money?

Liquid funds earn mainly through interest payments on their debt holdings. so let us understand it in some detail.
When interest rates fall, bond prices go up. When interest rates rise, bond prices fall. The negative relation between bond prices and interest rates is stronger for long term bonds. This means that the longer the maturity of a bond, the more it responds to changes in market yields.

Since a liquid fund invests only in short term securities, it’s market value does not respond much when interest rates change in the market. This means that liquid funds do not have significant capital gains or losses.

When/who to choose Liquid funds ?

When you have a certain amount of cash, but not ready to invest in anywhere. You have 3 options.

  • Have completely in cash form
  • Put in savings account.
  • Invest in liquid funds

Cash: it doesn’t earn you a penny, even if you if you keep with you many days you keep it with yourself

Savings account: here you can get around 2.5- 4 % of returns per annum.

Liquid fund: You can earn more than 7% ( it can be upto 9%) per annum.

This returns greater than 7% are rare but can be possible.

Pros:

  • High liquidity
  • Low risk when compared to other mutual funds
  • Low cost
  • Flexible holding period

According to me the High liquidity and low risk are the best advantages of liquid funds.

Can withdraw 50,000 or 90% of your money instantly (which ever is lower). And remaining money within 2 days.

Best performing liquid funds right now are following :

Best performing 5 liquid funds 2020

How to choose liquid fund?

Returns : always see the last 3 months returns of the fund and check if it generates desired returns or not. As liquid funds invest only for the time period of maximum of 90 days.

Expense ratio: lower the expense ratio better for the investor.

Note:

Liquid funds are of low risk which doesn’t mean zero risk. So before Investing make your own research regarding the liquid funds and invest if and only if it’s suitable to you . Dont invest in any of the securities without understanding it. Even it guarantees the profits. It’s my opinion.

Still have questions? Shoot in the comments 😜

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