“Liquidity funds” are mutual funds that deal only in short-term debt instruments. Mutual funds that invest in the money market purchase CDs, commercial paper, treasury bills, and call money. Money that is low-risk and readily available fits this criterion. Typically, there are no fees associated with withdrawing from a liquid fund. Investors in these schemes are not required to remain invested and may withdraw their funds at any time.
Who should invest in them?
What should you do if you have extra funds but are at a loss for creative ideas? Put it somewhere secure that you can immediately reach. You may immediately create and use a money market account as a secure location to store your funds while you decide what to do with them. Investors may invest in a liquid fund for short-term financial security.
Are liquid funds better than FD?
This comparison is improper. In an FD, your savings are protected for a certain period of time. In this regard, cash on hand may be likened to a savings account. This bank’s interest rate on savings accounts is 3.5 per cent. There is a possibility that a liquid fund will deliver a little greater return. Remember that the returns on liquid assets are connected with the market.
Does risk-free liquid money exist?
Due to their emphasis on short-term paper and assets with good credit scores, liquid funds provide the lowest risk among debt strategies. However, interest rate risk and credit risk persist with these vehicles.
How much do you intend to earn back?
The returns on an investment in a liquid fund may be somewhat higher than those on a standard savings account. According to internet sources, the average return for the last year in the liquid fund category was 3.46 per cent.
How do Liquid Mutual Funds stack up against Traditional Mutual Funds?
Understanding where and how liquid funds create money is essential to know how they operate.
What kind of investments do short-term funds make?
A liquid fund will often invest in short-term, high-quality, readily traded assets. SEBI has lately issued a series of recommendations that have reinforced these qualities of liquid funds. Liquid funds may only invest in listed commercial paper and may not have more than a 25% overall exposure to any one sector. According to SEBI standards, they cannot invest in anything that is overly risky. These restrictions are intended to reduce credit risk, or the likelihood of financial loss owing to the bankruptcy of the company whose papers are held by the liquid fund.
Revenue Generation
The principal source of income for liquid funds like SBI liquid fund is interest on debt instruments, with capital gains providing just a small proportion. Since it is so significant, let’s go more into this feature of liquid funds: when interest rates fall, bond prices rise. It is common knowledge that bond prices decrease when interest rates rise. Bond prices and interest rates have a stronger negative association with long-term bonds. Longer-term bonds are more susceptible to swings in market yields. In contrast, the market value of a liquid fund is less susceptible to changes in interest rates since it invests primarily in short-term assets.
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