Liquid funds provide a high degree of liquidity and safety consideration in terms of capital to an investor. For this reason the fund manager ends up investing in high risk quality debt instruments. How to invest in liquid funds means you have steady source of funds at your disposal. Pretty much on the same lines you can compare them to the savings account of a bank. There is no exit loads on such funds as you can operate them as per your own convenience.
The reasons for you to choose liquid funds
Such funds are recommended for an investor who has substantial amount of idle cash and for short term investment horizons. Rather than sticking to a savings account by investing in a liquid fund you can expect windfall profits.
They provide a viable channel to invest in liquid funds. At an initial level the amount of money can be saved in an equity fund and a systematic transfer to a specific equity account of your choice needs to be done. By doing so, you save yourself from placing large chunks of bet all of a sudden.
Points to consider as an investor
As risk in mutual funds relates to fluctuations of NAV; in case of liquid assets, the NAV does not fluctuate a lot as the underlying assets end up maturing within 90 days. This does mean that the NAV is not impacted a lot by the evolving price fluctuations of the market. But the fund value could drop all of a sudden due to the delinking of the credit rating. At another angle the point of consideration is that liquid funds are not completely risk free.
At a generic level the rates of returns on liquid funds are in the margin of 6 % to 9 %. This is a lot higher when you compare it to the returns that are obtained in case of a bank account. Still the returns on such funds are not assured upon redemption they have gone on to deliver positive returns.
In order to manage your funds, liquid funds levy a small charge referred to as expense ratio. The SEBI has mandated a fixed expense ratio. Such funds are known to maintain a low expense ratio over a short period of time.
The main objective of liquid funds is to invest the surplus cash over a short period of time which can be up to 3 months. By doing so it helps to realize the power of the underlying securities. For example in case if you have a shorter investment horizon of 1 year then you can look forward to invest in short term funds to gain higher returns.
To develop a surplus fund investment in liquid assets can work out to be really useful. Not only will you have surplus funds this can help you tide off unwanted emergencies.
The best part about investing in liquid funds is that it is hassle free and minimum amount of paper work is involved.