A financial safety net isn’t just a luxury—it’s a necessity, especially in uncertain times.
Emergencies come unannounced, and having a dedicated emergency fund is critical for everyone. While traditional savings accounts might be the go-to choice for parking emergency funds, liquid funds in India are gaining traction for their higher potential returns, liquidity, and low-risk profile. Let’s dive into how liquid funds can safeguard your financial future and explore the latest New Fund Offers (NFOs) in 2024.
Why an Emergency Goal is an Inevitable Financial Goal
Picture this: an unexpected medical expense, a job loss, or a sudden travel requirement. Emergencies can strike anytime, and not being financially prepared can throw your life off balance. That’s why creating an emergency goal should be a top priority in your financial planning.
An emergency fund ensures:
- Quick Access to Cash: You can handle unforeseen situations without disrupting your financial goals.
- Peace of Mind: Knowing that you have a financial cushion reduces stress.
- Avoid Debt: It keeps you from relying on high-interest loans or credit cards during crises.
So, how do you efficiently build and park your emergency fund? Enter liquid funds.
Liquid Fund Meaning: How Liquid Funds Work?
Liquid funds are a type of debt mutual fund that invests in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit.
The goal is to offer high liquidity and better returns than a savings account, all while minimising risk.
Here’s how they work:
- Investment Duration: Liquid funds typically invest in instruments with maturities of up to 91 days.
- Daily NAV (Net Asset Value): The NAV is calculated daily, allowing investors to benefit from compounding.
- Redemption Flexibility: You can withdraw your funds as needed, often with same-day or next-day settlement.
Who Should Invest in Liquid Funds?
Liquid funds are ideal for:
- Emergency Fund Creation: They offer a balance of safety, liquidity, and returns, making them perfect for emergencies.
- Short-Term Goals: If you’re saving for something within a year, liquid funds are a great option.
- Parking Surplus Cash: Use them as a holding place for idle money before deploying it into higher-risk investments.
Ready to take control of your finances? Set a Goal today to map out your financial journey!
Benefits of Investing in Liquid Funds
Why are liquid funds in India becoming increasingly popular? Let’s unpack the advantages:
1. Higher Returns Than Savings Accounts
While traditional savings accounts offer a modest interest rate, liquid funds can provide better returns, albeit with minimal risk.
2. Superior Liquidity
True to their name, liquid funds allow easy access to your money. You can redeem funds quickly, making them ideal for emergencies.
3. Low Risk
By investing in short-term, high-quality debt instruments, liquid funds minimise exposure to market volatility and credit risk.
4. No Lock-In Period
Unlike fixed deposits, liquid funds don’t tie up your money for a fixed term, offering unparalleled flexibility.
5. Fast Redemption Process
Fund houses typically process withdrawal requests within one business day, ensuring you have access to your money when you need it most. Some Asset Management Companies (AMCs) even offer instant redemption facilities, a feature made possible due to the highly liquid nature of the underlying securities in these funds.
6. Flexible Investment Options
Liquid funds cater to diverse investor preferences by offering two modes of investment:
- Lump Sum Investment: Perfect for those who wish to allocate a significant amount in one go, making it ideal for parking surplus cash.
- Systematic Investment Plan (SIP): This option lets investors contribute smaller amounts at regular intervals (monthly, quarterly, etc.), promoting disciplined investing and easing the financial burden.
Looking to park your funds smartly? Explore All Mutual Funds to find the right fit for your financial needs.
Factors to Consider While Investing in Liquid Mutual Funds
Before jumping into liquid funds, keep these factors in mind:
- Expense Ratio (TER): Choose funds with a low Total Expense Ratio to maximise net returns.
- Portfolio Quality: Ensure the fund invests in high-rated instruments for safety.
- Fund Size (AUM): Larger funds tend to be more stable but may dilute returns.
- Exit Load: Most liquid funds don’t have exit loads, but check for exceptions.
- Historical Returns: While past performance doesn’t guarantee future results, it gives an idea of the fund’s consistency.
Risks Involved While Investing in Liquid Funds
While liquid funds are considered low-risk, they aren’t risk-free:
- Credit Risk: Although rare, there’s a slight chance of default by issuers of debt instruments.
- Interest Rate Risk: Changes in interest rates can marginally affect fund returns.
- Redemption Delays: While unlikely, extreme market conditions might delay withdrawals.
New Liquid Fund NFOs in 2024
The year 2024 has seen some exciting new entrants in the liquid fund space. Here are some notable NFOs launched so far:
| Fund Name | TER | AUM (₹ in cr) | Risk |
|---|---|---|---|
| Shriram Liquid Growth Direct Plan | NA | NA | Low to Moderate Risk |
| Navi Liquid Unclaimed Redemption & Greater Than 3 Years Growth Direct Plan | 0.2% | 68 cr | Low to Moderate Risk |
Shriram AMC has launched a new liquid fund aimed at investors seeking low-risk, short-term investment options in November 2024.
With interest rates expected to decrease in the coming months, returns from liquid funds might trend lower, making them a conservative option for short-term deployment or as a gateway to systematic investment plans in equity funds.
Wrapping Up
Liquid funds have carved a niche for themselves as a reliable, efficient, and flexible investment vehicle for emergency and short-term goals. Their ability to offer better returns than savings accounts while maintaining high liquidity makes them an indispensable part of any well-rounded financial plan.
Want to kick-start your investment journey?
- Create a SIP to grow wealth consistently.
- Explore All Mutual Funds to find funds that match your needs.
- Set a Goal and secure your financial future today!
Liquid funds might not be the flashiest investment, but in the world of financial planning, they’re the silent saviour you didn’t know you needed.
So, why wait? Start now and ensure your emergency fund is as ready as you are.
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