What Are Liquid Funds?
Liquid funds are a sort of shared reserve. Liquid funds are different from mutual funds that invest in the equities, shares, or stock market usually. These are debt funds and do not put resources in the shares of any organization. The funds are debt funds and invest the resources into bonds, government securities, and debentures. Thus, people invest these funds only in the instruments of debt.
These funds are given that name as people invest in debt funds to gain these funds for a concise time. People invest in debt instruments with fixed returns. If a company needs money for two or three months, it takes debt with ten per cent interest. The company might submit a bond or debenture. These are invested in such funds. These funds are only invested in the instruments only when the debt funds have maturity periods of less than 91 days.
For example, imagine that a company requires capital or a loan for the short-term. The company takes out a bond or debenture with a maturity of three months. These debt instruments help companies raise money. People invest these types of funds in such debt instruments. It does not mean that you have to invest in liquid funds only for ninety-one days. One can invest in liquid funds for the desired time (even for months and years).
The fund manager invests in the different debt instruments when the investor opts for an extended period. Hence, there is no maturity period. The investors can redeem their investments whenever they want to. In case you redeem the amount before or within a week, you may have to pay the exit load. These are a subset of debt funds.
Advantages Of Liquid Funds:
- You can put all your cash in liquid funds, even for a couple of days.
- There is a flexibility to pull back the money invested if needed.
- One can invest the sum of his or her wish at any time.
- It gives monetary discipline to investors.
- You can access your money whenever you want to.
- There is no fixed lock-in period.
- There is high liquidity.
- It is ideal to invest bonuses or advance payments in the liquid funds. Liquid funds allow your money to grow more money.
- It is a low-risk investment as the maturity period is concise.
- Determination of Net Asset Value (NAV) every day throughout the year.
- No one can guarantee the profit.
- No insurance on the returns.
- Returns fluctuate. There is no fixed amount for the returns.
- There is a low risk of erosion of your capital.
How To Choose The Best Liquid Fund?
Do not look for the company with high returns. A company with a low credit rating or the one that is not credible to take loans offers a high-interest rate. It is always ideal to invest in government securities or companies with a triple-A (AAA) rating. The government and AAA-rated companies are the safest to invest the liquid funds in. This data about the companies is available in any mutual funds website. Experienced investors assume that liquid funds are secure when one can invest for more than seven days or below thirteen years. When you spend 50,0000, at the time of withdrawal, ninety per cent of the money is redeemed to your bank account instantly.
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Other Debt Funds:
Debt funds invest in bonds and debentures of different kinds, money market instruments of corporate ETFs, etc. The debt funds also invest in commercial papers, certificates of deposits. These are also a kind of mutual fund schemes. The information about the other debt funds is provided in the official websites of the companies offering mutual funds. The sites like Paytm give the list of ideal debt funds to invest in with all the information.
Advantages Of Other Debt Funds:
- Debt funds are less volatile.
- They are stable, as they make the risk limited.
- Debt funds can be a combination of both short and long terms.
- It has low transaction costs.
Disadvantages Of Other Debt Funds:
- Liquidity is low.
- They are confusing, with a lot of options available.
- The return is lower.
- There are extra costs like the transaction costs.
- It does not very stable returns.
- These returns are subject to both interest and credit rates.
How To Choose The Best Debt Funds?
The kinds of debt funds depend on the period of horizon or time. These are suitable for investors with surplus money and a short horizon. There is a wide range of choice of the other debt funds. The famous and low-risk debt funds are:
- Short-term debt funds: The horizon ranges from six months to a year. People invest these funds in securities.
- Long-term debt funds: People invest these in the government and corporate bonds. These funds invest in the debt securities portfolio of the important categories of debt securities. It is suitable for investors with a horizon of at least a year.
- Floating rate funds: The interest rate is continuously adjusted based on the interest rate prevalent in the current market. These are ideal for investment during the time of increasing interest rates.
- Government security funds: These are the debt funds that invest in only the short or long term government securities issued by the central or state governments.
- Corporate bond funds: These invest in different instruments of the companies.
Liquid Funds Vs Other Debt Funds:
Liquid funds are a better option than the other debt funds. They have a lower risk compared to the other debt funds. The returns obtained from the liquid funds are comparatively stable. The net asset value is determined every day, unlike the other debt funds.
Thus, its better to invest in liquid funds. The top three ones to invest in the year 2020 are Indiabulls Liquid Fund, JM Liquid fund, and Nippon India Liquid fund. It is, however, the choice of the investor to select based on the advantages and disadvantages of both the liquid and other debt funds.