There are a plethora of mutual fund investment options available today. With so many types of mutual fund options accessible to investors, individualsare spoilt with choices. As different individuals have separate investment goals and risk appetite, you should choose a mutual fund that aligns with your preferences.

If you are looking for mutual funds that offer higher returns than a savings bank account as well as easy liquidity, then liquid mutual fundsend your search right now.

What are liquid mutual funds?

Liquid funds are a type of mutual fund that invest principally in highly liquid debt securities and money market instruments that have residual maturities of up to 91 days. Liquid mutual funds offer high liquidity and generate optimal returns while simultaneously offering safety and security. These funds invest in instruments that are very short-term in nature such as Commercial Papers (CP), collateralized borrowing and lendingobligations (CBLO), Treasury bills (T-Bills), etc.

Who should invest in liquid funds?

Did you receivea sudden influx of cash such as unexpected gains from an investment or a bonus?Are you not sure what to do about it? Individuals looking to park their idle money can consider investing in liquid funds. These funds are the flavour of the season with new investors parking their savings in short-term but safe instruments like debt.

Ideally, liquid funds are suitable for short-term financial goals such as saving for a car down payment or buying household furniture, vacation,etc. However, investors should be careful not to park their entire emergency cash in liquid funds.

Why are liquid mutual funds so popular among investors?

Since liquid funds do not invest in volatile markets like stocks, they are perceived as a less risky instrument. However, this does not mean that they do not generate considerable returns. They are popular among retail investors for a variety of reasons. Some of them are:

  1. Lowrisk: Since liquid funds invest in ultra-short-term money market instruments with maturity profiles less than 3 months, the risk due to fluctuations in interest rates (owing to the unpredictable and volatile nature of financial markets) is reduced.

  2. Liquidity: Liquid funds are quick to access and offer effortless redemption, making them highly liquid debt instruments. When you are in dire need of funds, you can redeem your funds in liquid mutual funds and access your money within one to two working day.

  3. Decentreturns: Liquid funds and money market mutual funds offer decent returns, better than bank fixed deposits. Surplus cash invested in liquid funds also earns higher post-taxreturns.

  4. Flexibility: Since you are not bound by a lock-in period, liquid funds offer a lot of flexibility to their investors. You can exit liquid funds as per your convenience or stay invested until maturity.

How do liquid funds work?

The core objective of a liquid fund is to provide liquidity and capital appreciation to its investors. As such, a fund manager selects high-quality debt securities and invests in alignment with the scheme’s mandate. He/she further ensures that the average maturity of the portfolio is less than 91 days. By matching the maturity of individual debt securities, a fund manager tries to deliver optimal returns.

In a nutshell, liquid funds are for those looking to park their money in low-risk instruments. Their quick redemption feature further adds to its benefits and is the second reason why one can opt for a liquid fund as a preferred investment avenue.