According to recent research in India, 35.11 percent of participants were concerned that job loss would be a significant uncertainty. Another study inferred that around 88 percent of Indians anticipate financial uncertainties over the next five years.
With this background, considering financial uncertainties is not an option but a basic financial survival fear. Indian investors often face a myriad of uncertainties.
A few of these are inflation, share market volatility, unexpected expenses, job loss, health emergencies, theft, and fluctuating interest rates. Such uncertainties can disrupt financial plans and leave investors seeking a haven for their funds. Therefore, having an emergency corpus in place is more important than ever, even before you can consider other financial goals.
Liquid mutual funds emerge as a prudent investment option, offering a unique blend of liquidity, stability, and modest returns.
Here is an essential curation of topics on everything you need to know about liquid mutual funds:
The Basics Of Liquid Funds
Liquid funds are a type of debt mutual fund. These funds invest in short-term money market instruments with a maturity period of up to 91 days. The underlying assets of liquid funds include treasury bills, commercial paper, certificates of deposit, and other debt securities issued by government entities, banks, and corporations. Liquid funds can be considered more liquid than other debt funds. Their short-term nature allows investors to access their money quickly with lower risk.
Navigating Financial Uncertainties: The Indian Context
A range of financial uncertainties often confront Indian investors. Such uncertainties can impact their investment strategies:
Inflation
Inflation is the most common and can be the most destructive financial uncertainty. The prices of everything from items of daily use to services keep increasing every year. However, this increase can gradually eat away at your savings as the prices of your goals keep growing.
Market Volatility
The Indian stock market can offer significant growth but is prone to volatility. Unexpected market plunges might erode the value of equity investment or profit margin.
Unexpected Expenses
Unforeseen contingencies like unexpected expenses in the following can arise at any given point in time:
- Medical emergencies,
- Inflation
- Job loss,
- Home repairs,
- Urgent travel
- Theft and more.
Having access to liquid funds can help investors meet these unforeseen financial needs without disrupting their long-term investment plans.
Fluctuating Interest Rates
Interest rates in India or anywhere else globally can fluctuate, impacting returns on fixed-income investments. Liquid funds can offer flexibility in navigating these changes as their portfolios adjust to prevailing interest rates.
Regulatory Changes
Changes in government policies and regulations can impact various investment avenues. Liquid funds are closely regulated and can offer stability and transparency in navigating such financial uncertainties.
Liquid Funds Example
Gauri Shankar is a salaried employee who diligently invests in equity mutual funds using a share market app to achieve his long-term financial goals. However, he recently lost his job due to AI technology taking over his work. Instead of disrupting his long-term investments, he lived on his emergency corpus and focused on enhancing his skills through professional certifications. Gauri wisely parked a portion of his savings in a liquid mutual fund. This investment decision allowed him to quickly access the required funds and avoid losses or compromise his financial stability.
Advantages Of Liquid Funds
Liquid mutual funds can offer many benefits for investors seeking safer and liquid investment options:
High Liquidity
Liquidity is like the hallmark of liquid funds in India. Investors can redeem their units and receive the funds in their bank account within one business day. This can make liquid funds a better option for parking emergency funds.
Low Risk
Liquid funds have a lower risk profile. The underlying securities of liquid funds have a short maturity period. Highly creditworthy entities typically issue them. This can make them a safer alternative than equity investments or long-term debt funds.
Stable Returns
These funds focus on stability, and their returns can be predictable. They are generally higher than traditional savings accounts, making them suitable for preserving capital and earning modest returns in the short term.
Diversification
Liquid funds can invest in a diversified portfolio of money market instruments. This reduces the overall risk profile and ensures steadier returns. It also enhances portfolio stability and minimise the downside potential to some extend.
Easy Accessibility
Investing in liquid funds can be simple and accessible. Investors can open demat account online through a demat app or other platforms. This ease of access can make these mutual funds convenient for all investors.
Investment Opportunities With Liquid Funds
Liquid funds cater to various investment needs and can be strategically utilised for various purposes. Some of these are as follows:
- Building a substantial emergency corpus is crucial for financial security. Liquid funds can provide an ideal avenue for parking emergency savings, ensuring quick access to funds when unforeseen or emergency needs arise.
- Saving for short-term goals like a vacation, a new gadget, or a down payment for a car? Liquid funds can offer a safe and liquid option to park your savings. You can also earn steady returns while you work towards your goals.
- Investors often need temporary storage space for their funds, especially when transitioning between investments or awaiting better market opportunities. Liquid funds can offer such a haven, ensuring liquidity and minimising risk.
- Businesses and individuals with less steady cash flows can utilise liquid funds to efficiently manage their surplus funds and optimise their short-term cash management.
Liquid Funds vs. Other Investment Options
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Savings Accounts
While offering higher liquidity, savings accounts might typically offer lower returns than liquid mutual funds.
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Fixed Deposits
Fixed deposits might offer higher returns than liquid funds. However, liquid fund investments can compensate for FDs’ lack of liquidity and flexibility. In addition, premature withdrawal from FDs can incur penalties.
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Money Market Accounts
Most investors might not be aware of directly investing in them. Furthermore, they might require huge lumpsum investments (minimum balance requirements) and be complicated for lay investors.
How To Choose the Right Liquid Fund?
When selecting a liquid fund, investors can consider the following factors:
- The expense ratio represents the annual fee charged by the fund house for managing the fund. Investors can opt for funds with lower expense ratios to maximise potential final returns.
- Investors can analyse the fund’s past performance to gauge its consistency and ability to deliver stable returns.
- The credit quality of the fund’s underlying securities can help investors understand the risk involved. They can assess the same to understand risk better.
Conclusion
With many uncertainties impacting your investments and daily life, liquid mutual funds can provide a safer space for your emergency corpus. Investors seeking more liquidity stability in returns may find these funds better. The ability of liquid fund investments to navigate market volatility, meet unexpected expenses, and manage short-term cash flows makes them an indispensable tool in any investor’s portfolio. Investors can understand the benefits and investment opportunities offered by liquid funds to make informed liquid funds investment decisions and build a sturdy and resilient financial foundation.