If you were to Google the term Liquid Funds, you would read something to this effect:
“Liquid funds are debt mutual funds that invest your money in short-term money market instruments that hold the least amount of risk. These instruments normally mature within 91 days, but withdrawals from the fund can be made anytime.”
As far as descriptions go, this one is pretty apt. However, it’s not the easiest to understand. So here’s a lowdown on what Liquid Funds actually are, and why you should invest in them.
Understanding Liquid Funds
Let’s say you have some money saved up which you do not need immediately. Would you rather keep this money at home, in your savings account, or invest this in a fund that will get you higher returns? If you choose the first two options, you haven’t yet understood the art of using your money to make more of it. If you choose the third option, you have just begun your journey to the world of wise investments. Congratulations!
“Personally, I tend to worry about what I save, not what I spend.”
– Paul Clitheroe, Financial Analyst and TV Presenter
Now, you can invest this money in many different ways – one option is to put it in a Fixed Deposit which is basically a euphemism for locking away your money where you cannot touch it before maturity. In fact, you may even end up paying a penalty if you withdraw this money before the tenure is over. The other option is to invest in Mutual Funds; one type of which is called a Liquid Mutual Fund. Here are some reasons to invest in these funds:
Zero exit load: Invest anytime. Withdraw anytime. Best way to put your idle money to work. Get your money out of that sad 3.5% savings account and put it in handpicked liquid funds. Get double the interest than your bank. You can park your excess money or use it as your rainy day (emergency) fund. You can choose to invest via SIP or Lumpsum.
Superior liquidity compared to bank FDs: Bank FDs would penalize you for premature withdrawal.
High returns as compared to savings fund: Liquid fund returns in the last three years have been quite impressive with the category averaging 8.9 percent on an annualized basis.
Here’s how Liquid Funds have fared over the last six years:
For both short term and long term Liquid funds, the yield percentage is generally very high. Here’s a comparison between the both:
Now that you know the Why, let’s get to the What.
Simply put, a Liquid Mutual Fund is a low-risk investment wherein your money is invested into treasury bills, money market instruments, and very short-term corporate papers. Let’s understand these in detail below:
Treasury Bills: These are government securities auctioned by the RBI at regular intervals. They are sold to the public at discounted values. While these yield no interest, you can sell them for a higher value than what you originally paid while buying, thus earning a profit.
Short-term Corporate Papers: Large corporations sometimes issue securities/bonds to obtain short-term debts. These work the same as Treasury Bills.
Money-Market Instruments: Apart from the above two, your money can also be invested in various other instruments such as Certificate of Deposits (CDs), Bank Assurances. Repurchase Agreements etc. which are all short-term, low-risk investments that can help you increase your returns.
The most important thing you need to know is that at any given point in time the money invested in Liquid Funds can be withdrawn within minutes.
This ‘instant redemption’ feature is what makes Liquid Funds so attractive. This ties back in with the idea that we started with – the creation of an emergency fund that is available to you when you need it, and yet makes money for you when it is sitting idle. Win-win situation? Completely!
“In investing, what is comfortable is rarely profitable.”
– Robert Arnott, Chairman, and Founder of Research Affiliate
And here’s the How.
We are a country where assets under management (AUM) to gross domestic product (GDP) ratio is still the lowest at 8% (The US is 91%, the UK is 50%, and Brazil is 38%). This means that Indians have traditionally shied away from investing in Mutual Funds and other tools and usually put their money into bank deposits, real estate, and gold. Fintech solutions like ClearTax’s can help lower the over-dependence on these traditional investing options.
At ClearTax, investing is made even more simple. You can finish the KYC requirements online with our e-KYC feature, and our platform will give you a curated option of funds to invest in. This portfolio is suggested by our experts after tons of research on market trends, past returns and fund performance, and your budgetary constraints. Once the investment option is set up, investors can easily track the performance of their investments through the easy-to-use ClearTax UI.
And, we provide the facility of ‘instant redemption’. Instant redemption is an ‘online-only’ transaction service that allows an advisor/investor to redeem their investments instantly, at any time of the day/week/year. The funds are transferred into your registered bank account in “real time”; in less than 1 minute.
The Liquid Funds on the ClearTax site allow investors to instantly redeem 90% of their holding balance or upto Rs. 50,000 per calendar day (whichever is lesser), per individual PAN holder.
So, don’t wait for a rainy day to create your emergency Liquid Fund (pardon the pun!). Begin now and enjoy the peace of mind this brings you. In fact, take a leaf from business mogul Warren Buffet’s book of investing wisdom and start right away…
“I made my first investment at age eleven. I was wasting my life until then.”
– Warren Buffet, Investment Guru