Irrespective of the kind of work people do to earn a livelihood, there is one common habit they all follow – saving an amount aside for later use in a bank account. Over time, this amount sums up to gain a higher value while also giving a minimal rate of interest in addition. If you do this as well, you will agree with the fact that most people are not sure when they will need this money at all.
Because of this uncertainty, the money lies idle in the bank accounts. If you would think of investing this money, there are three things you want to ensure:
- You want to park the money for a short time period.
- You do not want the investment value to drop.
- You want your capital to be safe.
Given the above three conditions, putting money aside may seem to serve the purpose of money-saving. But you can earn more when you invest in a liquid fund. Wondering what is liquid fund and how you can invest in it? Let’s dig deeper.
What is Liquid Fund?
Liquid funds are one of the types of debt funds that have a short-term investment horizon. They mainly invest in money market instruments with a maturity period of 91 days only. You can think of a liquid fund as a better way to deal with surplus cash. One reason why many investors choose to invest in these funds is to fulfill their objective of preserving the capital while also getting high liquidity.
In investment terms, liquidity means how easily you can invest in a financial instrument and redeem the invested capital.
For liquid funds, liquidity means you can choose to invest in a liquid fund for a few days or till its maturity, based on your financial objectives. You will get the returns on your investment based on the market rate.
More About Exit Load on Liquid Funds
Next to knowing what is liquid fund, you should also be aware of the exit load on these funds. Exit load, in various mutual fund schemes, is the cost that you need to bear if you sell your mutual fund units before a predefined time. In other words, it can be considered the penalty payable for not staying invested in the chosen funds.
Another advantage of investing in a liquid fund is there is no exit load applicable. You can invest in schemes that have daily, weekly, or monthly growth options. Not only will you receive steady returns over short time-period, but you can also enjoy seamless redemption of your investment within 24 hours.
Difference Between Returns from Liquid Funds or a Savings Account
Along with understanding what a liquid fund is, you must know about the associated risk factor. Liquid funds are not totally free of risk but are low risk – low return investment instruments. They are subject to both the credit risk and the risk of interest rate fluctuations because the money is invested primarily in debt instruments. On the other hand, saving bank accounts generate a risk-free return. You are assured you will get the interest credited into your account regularly.
The difference between the two is that the return you will receive from your investment in a liquid fund is comparatively higher than keeping your money in a savings account.
Choose Liquid Funds with The Help of a Financial Advisor
The more you know about what a liquid fund is, the more you will feel confident about investing in it because of the related benefits.
However, you should know that there are several liquid funds in India, and making the right selection may feel difficult if you have no experience in capital investment.
It is where reputable financial advisory firms can help you out. You can connect with them to create your best return making investment portfolio and invest in liquid funds accordingly.