Liquid funds are a type of debt mutual fund that invests in short-term instruments like treasury bills, commercial papers, and certificates of deposit. Considering the nature of liquid funds, they are low risk and highly liquid. This makes them a suitable option for individuals looking for quick access to capital. No matter if you are a beginner, a salaried professional, or a business owner, liquid funds can help you manage surplus cash efficiently. This article discusses the key benefits of liquid funds.
Key Benefits of Liquid Funds
The following are the key benefits of investing in liquid fund.
High Liquidity
The key advantage of liquid funds is that they allow you to access your capital quickly. Most mutual fund companies offer same-day or next-day redemption. This is very useful in emergencies or when you need funds on short notice. Compared to other investment options like fixed deposits, where you might have to pay a penalty for early withdrawal, liquid funds have no such restrictions.
Low Risk
Liquid funds invest in short-term, high-quality debt instruments with maturities of up to 91 days. This reduces the chances of large fluctuations in the value of your investment. Since they are not directly affected by stock market volatility, they are considered safer than equity mutual funds. For conservative investors, liquid funds can be a way to earn stable returns without taking on high risks.
Better Returns than a Savings Account
A typical savings account in India usually offers an annual interest of 3–4%. However, liquid funds can provide slightly better returns, typically between 5 and 7%, depending on the market scenario. This makes them a more suitable option for growing short–term funds instead of just keeping them dormant in a regular bank account.
No Lock-in Period
Liquid funds don’t have a lock-in period like fixed deposits or tax-saving schemes. There is no penalty to withdraw your capital, you can invest and withdraw at any time. It provides the flexibility to accommodate both planned and unplanned expenses.
Low Volatility
Since these liquid funds do not invest in instruments of more than three months’ maturity, they do not remain much sensitive to interest rate changes. Focusing on short-term instruments keeps the Net Asset Value (NAV) stable, giving investors more confidence and reassurance.
Tax Efficiency
Liquid funds are eligible for long-term capital gains tax indexation advantages if you hold them for more than three years. This can considerably lower your tax liability.
Suitable for Temporary Fund Storage
Sometimes, you may have extra capital that you do not wish to invest in long-term options right away. For example, if you are waiting for the right time to invest in stocks or property, you can place the funds in a liquid fund instead of leaving them idle. This way, your funds can earn more than a savings account while remaining easily accessible.
Easy to Invest and Redeem
Generally, the liquid funds can be bought and sold online through mutual fund platforms, mobile apps, or your bank. The process is simple, paperless, and fast. Many fund houses also offer instant redemption facilities for amounts up to a certain limit.
Better Alternative to Short-Term Deposits
For short-term goals, such as paying for an upcoming vacation, school fees, or a wedding, liquid funds are a more suitable option than traditional banks with short-term deposits. Liquid funds offer similar safety but usually with better returns and more flexibility. With the help of a reliable liquid funds app, you can invest and withdraw your funds anytime without visiting a bank.
Helps in Financial Planning
Liquid funds can be used strategically in financial planning. For instance, if you receive a lump sum payment, you can adjust it in a liquid fund and withdraw it in parts as needed. This prevents overspending and keeps your capital working for you until you withdraw it.
Conclusion
Liquid funds combine safety, flexibility, and convenience, making them a suitable choice for short-term investments or managing surplus capital. They offer quick access to funds, stable returns, and tax efficiency, all while keeping the risk relatively low. Whether you are building an emergency fund, saving for near-term expenses, or simply looking for a place to park idle capital, liquid funds can serve the purpose effectively. With the added convenience of online platforms and liquid fund apps, investing and redeeming has become easier than e ever. There are trusted fund houses like Axis MF that offer well-managed liquid fund options, giving investors confidence in the safety and performance of their investments.
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