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7 Reasons to Invest in a Liquid Fund

A mutual fund is a smart investment tool that can also be considered to achieve long term financial goals. Mutual fund houses collect money from people who share a common investment interest and invest this pool of funds in various assets, including debt, equity, corporate bonds, government securities, and similar money market instruments. When you purchase a mutual fund, you are allotted units in the form of shares. These units are allotted as per the fund’s existing net asset value or NAV. For example, if the mutual fund you invested Rs. 500 has its current NAV as 50, and you will be allotted 10 mutual fund units.

Liquid funds are ideal for those who have idle cash parked in their bank, which can be put for better use via investing. These funds invest in market securities like treasury bills, call money, and government securities, which come with a maturity period of up to 31 days. Liquid funds are optimum for investors with short term investment goals. These open ended debt mutual funds do not have any lock in period, and investors may continue till the scheme is giving positive returns. As the title suggests, liquid funds offer high liquidity to its investors, and you can redeem your fund units or withdraw the investment amount within one business day.  

If you are willing to take some risk with the hope of earning better rewards, you may consider investing in liquid fund. Need more information on liquid funds? Here are seven reasons to invest in liquid funds:

1.      Liquid funds are professionally managed funds

Liquid funds are debt funds usually managed by a fund manager holding vast industry experience. It is the job of the fund manager to actively buy/sell stocks on behalf of investors. The fund managers combine his/her expertise with years of experience and take investment decisions with the hope of meeting the liquid fund’s investment objective.

2.      Liquid funds carry less amount of risk

Although it is true that no investment is a risk free investment, there are products that carry risk in varying proportions. Because these are debt funds, liquid mutual funds carry less amount of risk as compared to equity oriented funds.

3.      Liquid funds offer diversification

Liquid funds invest in various debt and debt related instruments like certificates of deposits, commercial papers, treasury bills, call money, and government securities. Having such a diversified portfolio doesn’t just help in reducing risk, but also allows the fund to cope during volatile market conditions.

4.      Liquid funds are best to park your ideal money

If you have idle money parked, it is advisable that you move it to liquid funds. This way, you allow your idle money to grow, which otherwise would have remained stagnant. Liquid funds invest in a diversified portfolio, and hence, there is an excellent chance for your idle money to grow and turn into beneficial investment.

5.      This fund offers high liquidity

Another good thing about liquid funds is that you can redeem them according to your own convenience. A majority of liquid funds, if remained invested in for a minimum one week, do not levy any exit load on its investors. This way, liquid funds are an ideal investment option for those looking to give their mutual fund portfolio some liquidity.

6.      There is no upper limit for liquid fund investments

If you want, you can invest in liquid funds without any restrictions. There are no limitations when it comes to liquid funds, and investors can invest depending on their risk appetite. This is ideal for lump sum investment as you receive a large number of units depending on the fund’s existing NAV. As the fund performs and continues to make progress, the price of units will go up, increasing your profit margin.

7.      You can invest in liquid funds via SIP

SIP or Systematic Investment Plan is a systematic approach to give your liquid fund investments a disciplinary approach. When you opt for SIP, you instruct the bank to deduct a certain amount from your account and transfer it to your liquid fund account. You may continue investing in liquid funds through SIP until your investment objective is met. If you remain invested for the long term, you even stand a chance to benefit from the power of compounding.

We hope the above article succeeds in providing you with relevant information about liquid funds. Remember to stay loyal to your investments and, if possible, invest only within your limits. Investing isn’t rocket science, and you shouldn’t treat it like that either. If you invest smartly and stick to your strategy, you, too, stand a chance of building a decent corpus in the long run.

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