What are liquid funds?. Is it better than FD.? Should you invest in liquid funds.? How much return can you get.? Is this safe.?
Yes, I know there are many questions like this in your mind. So here we will discuss all the details about liquid funds.
We all want to invest our money. If we get many options to invest our money then it will be very good for us. You should remember one thing that-
NEVER PUT ALL YOUR EGGS IN ONE BASKET.
So you should invest in various sectors. Because if you invest in one sector and if you lose your money then that will bankrupt you.
In this case, liquid funds can be a very good option. But you should all the details about this fund before you invest here. Let’s discuss all the points one by one.
What are liquid funds ?–
It is one type of mutual fund. But when we talk about mutual funds then equity, the share market comes in our mind.
We know that mutual funds invest in the stock market. But these liquid funds are different from this.
Liquid funds are debt funds. It invests in bonds, government securities, debentures. That means it’s investing in debt instruments. Where it gets a fixed return.
Like if a company needs money and the company wants to take that money from the market or direct from the people for just 2 or 3 months and they want to give 10 percent interest per annum against their bond or debentures, that you can call a liquid fund. So the public will invest in it.
So liquid funds invest in these kinds of instruments.
Why its name is a liquid fund ( Disadvantages of liquid funds)–
Now you will ask a question that why it is called a liquid fund.? Well, it invests in very short-term debt instruments.
That means liquid funds can only invest in that instruments which’s maturity period is less than 91 days.
As we discussed before, if a company needs money for 3 months ( within 91 days ) then it will announce that to subscribe or invest in their bonds or debentures and the company will return the money with interest after 3 months.
So the debt instruments, which helps the company to raise the fund for 2 or 3 months the liquid funds invest in them only.
But it does not mean that you can invest only for 91 days or less than that in liquid funds. You can invest as long as you want in liquid funds.
The fund manager invests your money in a company for 91 days first.
After maturity, the fund manager will invest that money in a company for 91 days again. So in this process, you can invest as long as you want.
You can also redeem your invested money anytime you want. But if you redeem it within 7 days then you need to give a very tiny exit load amount.
Better than FD or not.? (What are liquid funds? )–
|1.In FD you can get max to max 6 to 8 percent return||1.If you are doing an FD in a government bank or a big private bank then your money is almost risk-free. |
Now you can also get insurance in the FD up to 5 lacs.
|1.If you want to invest every month ( In FD ) then you need to make a new FD every month.|
|1.In Liquid Fund also you can get a 6 to 9 percent return approximately.|
So in this sector, both are equal, you can say.
|1. In Liquid funds also the risk is very low but you will not get any insurance or guarantee here. |
It is depending on that company to return the money against the bonds or debentures.
But it is assumed to be a very low-risk fund because the maturity period is very short. But like FD it is not risk-free.
|1. In liquid funds, there are no such requirements. It is much more flexible. |
It is up to you that when you want to invest and how much amount you want to invest.
As well as you can invest in the same fund regularly.
There is a very good option in saving or current account called AUTO SWEEP. Here you can get an interest rate like FD without doing an FD over a certain amount.
Auto sweep vs liquid funds ( What are liquid funds )—
Auto sweep is not available in every bank. So if your bank doesn’t have this facility then liquid funds can be a better option.
As well as if you are doing a short-term FD then you can’t get higher interest rates. Then also liquid funds can be a very good option for you.
In auto sweep also you can withdraw your money whenever you want. In this case, also you can go with the liquid funds if you don’t have discipline.
But you can’t get the facility like an auto sweep in this case.
But remember that it is not a risk-free product. You can say that it is a low-risk product.
For example- If you check the record of the last 13 years, you will see that if you keep your money here for more than seven days, you will not lose your capital. ( Data till March 2020)
So you can understand that this is a very low-risk fund.
How to choose the right liquid fund ( What are liquid funds )–
If you are choosing the fund by seeing its return then this can be dangerous in liquid funds. You have to understand why.? The company that does not have a good credit rating, offers a high-interest rate.
Because they are not getting any loan from the bank or the market so from where they can get the money.?
That is why they offer a high-interest rate to attract people. So any liquid fund can give you a higher return by taking a higher risk.
These funds invest in some companies like B-rated, BB-rated E.T.C. These funds can give you higher returns but if any of the invested companies goes down then anything can happen. Your capital can also be in danger.
So the purpose of investing in mutual funds is not to get a higher return. The purpose should be – to keep the money safe as well as to earn equal or more than FD.
But safety should be the first requirement. That is why do not choose liquid funds according to their return. What you should check is-
1.Most of the investments should be in government securities. Because the government will not make any payment issue.
2. You should always choose an AAA-rated company to invest in.
You can find this data on that particular liquid fund’s website.
Investment is the most important thing which can make you rich. But where to invest is up to you. You should set your goal first. And according to your goal, you should invest.
1.Is it good to invest in liquid funds?
It is giving you a high amount of liquidity. You can redeem your gains within just one working day.
If anyone invests for a short period, with a decent interest rate then it can be a good option.
2.How long should you invest in liquid funds?
As we discussed before you can invest here as long as you can. Just because it offers a high amount of liquidity that is why invest for the time that you want.
3.How to invest in liquid funds?
It is a debt-oriented type of mutual fund. So you can invest here by the process you invest in a mutual fund.
You can invest through various apps like Grow or you can invest through your DEMAT account.
4.Do we need a DEMAT account for liquid funds?
It is not a mandatory thing. We discussed this before. You can invest through various apps or you can use a DEMAT account.
5.What is the difference between a debt fund and a liquid fund?
Debt funds are referred to the mutual fund category. It invests the money in fixed-income securities.
The liquid fund is a subset of a debt fund scheme that invests its fund in fixed securities having a very short maturity time.
Disadvantages of liquid funds-
Short-term capital gains in liquid funds will be added to your income and will be taxed as per the tax slab.
If you are doing an FD then you don’t need to pay any fees but if you are investing in liquid funds you need to pay it, although it is too low.
It is a very low-risk fund but not risk-free.
Here you will get an idea that What are liquid funds.