Liquid funds belong to the category of debt funds. In my opinion, they belong to one type of investment that can really prove a useful tool in the toolkit of any adviser. Since these are mainly short-term money market instruments, like treasury bills, commercial papers, and certificates of deposit, they mostly offer very high liquidity and a very low risk.
Mostly, an adviser recommends liquid funds to those investors who simply want to keep their money deposited somewhere safely but are willing to forego some gains that otherwise would be put forth by a traditional savings account.
How Liquid Funds Work:
Liquid funds invest in securities that mature within up to 91 days to generate returns. This is an area where an investment advisor can work well with clients to make the most of short-term investments. Short maturity helps ensure low market risk, something an experienced investment adviser can assure clients who want stability.
Key Benefits of Liquid Funds
High Liquidity: An investment advisor would bring out that liquid funds make available the money very easily, often within 24 hours. Hence, it is a good choice for savings in case of an emergency or short-term goals.
Low Risk: For clients who are risk-averse, an investment advisor can point out that liquid funds carry minimal risk due to their focus on short-term securities.
The tax efficiency of liquid funds can often be compared by the financial advisor to that of other alternatives, such as fixed deposits, especially for people in higher tax brackets.
Better Returns: The investment advisor would further explain that though not as high as equity funds, liquid funds generally provide better returns than a standard savings account.
No Lock-in Period: Unlike FDs, an investment advisor would say that the liquid funds do not have any lock-in period; hence, flexibility without any penalty for withdrawal is offered.
How Liquid Funds Differs from Other Funds:
- Liquid Funds vs Savings Account:
An investment advisor will further highlight how savings accounts can be accessed instantly, but liquid funds yield better returns while offering nearly the same amount of liquidity with immediate redemptions. - Liquid Funds vs. Fixed Deposits:
The money you put in a fixed deposit is all locked-in. It cannot be used until the maturity date. An investment advisor would always suggest liquid funds for their flexibility and also for tax efficiency, which, most of the times, generates better post-tax returns. - Liquid Funds vs. Debt Funds:
Professional investment advisors can help clients make the right calls between liquid and debt funds with the difference in risk and returns. A long-term investment horizon is what makes debt funds risk-prone, but liquid funds, by nature, are a safer option for shorter-term goals. - Liquid Funds vs. Equity Funds:
An investment advisor would highlight that equity funds carry higher potential returns but with a higher risk as well. Liquid funds, however, are stable and better suited for a short-term goal and lower-risk profile.
When to Use Liquid Funds:
Emergency fund: Investment advisor would recommend that you put your emergency fund in liquid funds for they are liquid and safe.
Investment in Liquid Funds: An investment advisor will probably recommend liquid funds to an investor with idle cash for earning returns better than a savings account while still allowing easy access.
Short-Term Goals for You: Your investment advisor can help you determine whether or not liquid funds are the most suitable option for short-term goals such as planning a trip because liquid funds provide higher returns than the traditional banking products.
Liquid funds are ideal for risk-free, low-risk short-term investment. Most often, an investment advisor would recommend them to his or her clients who are more intent on safety, liquidity, and stable returns rather than higher and riskier potential gains from equity investments. For anyone who is not really sure of the proper balance that exists between safety and growth, advice from an investment advisor will help you align your portfolio with your short-term financial needs.