What are Liquid Funds? List of Best 5 Liquid Funds to Invest in 2021
Liquid mutual funds are one of the many debt funds. One needs a clear understanding of their investment horizon since they are based on duration. From overnight to long-duration funds of 7 years, debt funds have been classified into 16 different categories. This step by SEBI is to help investors find the right type of fund without being overwhelmed by the choices. Now let us explore what Liquid Mutual Funds are and talk about everything you need to know about them before investing.
What are Liquid Funds?
A Liquid Fund is a debt fund investing in fixed instruments like commercial paper, government securities, treasury bills, etc., with a maturity timeline of up to 91 days. The net asset value of a liquid fund is calculated for 365 days.
Investors can withdraw from the process within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category.
How do Liquid Funds work?
The sole objective of a liquid fund is to provide capital protection and liquidity to the investors. The fund manager opts for high-quality debt securities and invests according to the scheme's requirements. Additionally, they ensure that the portfolio's average maturity is not more than 91 days. When matching the maturity of individual securities with the portfolio's maturity, the fund manager tries to deliver better return rates. Liquid funds are known to offer a better outcome than a regular savings account.
Also read: Liquid Funds vs Fixed Deposits: How To Make The Right Choice
Things to Note as an Investor
Objective
Liquid funds are the least risky classes of debt funds. The NAV doesn't fluctuate too often as the assets have a maturity period of 60 to 91 days. Help the NAV of liquid funds from getting impacted by the underlying asset price fluctuations. In simple words, they are not entirely risk-free but safer than most of the other mutual funds.
Expected Returns
Previously, liquid funds have provided returns in the range of 7% to 9%, which is way higher than the regular savings bank account. Even though the returns are not guaranteed, they have delivered positive returns on redemption more often than not.
Cost
Like all mutual funds, Liquid funds levy a fee to manage investments, called the 'expense ratio.' SEBI has announced the expense ratio to be lower than 2.25%. Considering the fund manager's hold till maturity strategy, liquid funds get a lower expense ratio with higher returns over a short period.
Investment Horizon
Liquid funds are especially for investing the surplus cash for a short duration, up to three months. Such a short horizon helps to realize the full potential of the underlying securities. If you have a longer investment term of up to one year, you may consider investing in ultra-short-term funds to get relatively higher returns.
Financial Goals
If you want to create an emergency fund, then liquid funds can prove to be very useful. Since there is no lock-in period, it helps you pull out your money quickly in case of emergencies.
Also read: How To Get Started With Investing Money
Top Five Liquid Funds
IDBI Liquid Fund Growth
This fund has given 6% annualized returns in the past three years. It is one of the most remarkable mutual funds with minimum lump sum investment required to invest as Rs5000 and SIP as Rs500.
ICICI Prudential Liquid Fund
This fund has continuously hit the benchmark in the Debt segment with a 3.29% return last year and a 5.5% annualized return over the previous three years. The minimum Lump sum investment required in this is Rs100 and Rs100 for SIP Investment.
Mahindra Manulife Liquid Fund Growth
This fund has hit 5.56% annualized returns in the past three years and has consistently outperformed similar funds. The minimum Lump sum investment required in this is Rs1,000 and Rs500 for SIP Investment.
Aditya Birla Sun Life Liquid Fund Growth
With a return of 3.3% last year and an annualized return of 5.51% in the previous three years, this fund has performed exceptionally well in the Debt segment. The minimum Lump sum investment required in this is Rs500 and Rs1,000 for SIP Investment.
Axis Liquid Fund Direct-Growth
This fund has outperformed the returns in the Debt Segment in India. With a 3.27% return last year and a 5.46% annualized return during the previous three years. The minimum Lump sum investment required in this is Rs500 and Rs500 for SIP Investment.
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