In the note about debt mutual funds, I had mentioned how Liquid mutual funds is something to watch out for. In this article, let’s explore how and when you can include Liquid mutual funds into your portfolio.
A Liquid mutual fund is a debt fund that invests in short term debt instruments (treasury bills, government securities, cash deposits, bonds etc.) with a maturity of up to 91 days.
In other words, in a Liquid mutual fund, the fund manager invests money in short term, safe instruments that have relatively short term maturity. The returns of a Liquid mutual funds will be somewhere close to that of a fixed deposit or a tad bit lower.
One natural question one might have is, why invest in a Liquid mutual fund when you can park money in a savings bank account for ultra short term goals, or a fixed deposit for goals within a year or two. Let me explain this with a real life incident.
In 2013, I had saved up about 6L INR to buy a car. The car I wanted was a Bolero, with a specific engine that was no longer being produced at the time. The search for a good Bolero took about 11 months and all this time the money stayed in my savings account.
Knowing what I know now, this would have been the perfect opportunity to use a Liquid Mutual Fund.
- Funds would have been invested in a safe instrument that doesn’t move up or down with the equity market.
- Unlike a fixed deposit, a Liquid mutual fund does not have a maturity date. Which means you can access your funds any time you need without any pre-mature closure penalty. Your funds are “liquid”! (There is an exit load on some funds if you withdraw within the first 7 days.)
- I believe, savings bank accounts at the time offered 4% interest.
- Had I invested in a Liquid mutual fund, I would have received, let’s say, 7% interest. A difference of 3%.
- 3% of 6L for 11 months is 16,500 INR. If I remember correctly, that was worth just about five full tanks of diesel.
Example uses for a Liquid Fund
- You are saving up for a trip, but you don’t know when you are going. It could be in 6 months, it could be in a year.
- You have your salary coming in, but you do not see any investing opportunities in direct equity right now. You can use a Liquid fund as an “opportunity fund” to save up for the right investing opportunity.
- A part of your emergency fund can be in a Liquid fund.
Some Liquid Funds offer instant redemption!
This is the single biggest feature that makes Liquid Funds unique and different from almost every other debt fund. Many Liquid Funds offer instant redemption up to 50,000 INR or 90% of portfolio (whichever is lower).
Typically when you redeem a mutual fund, you place a request to the AMC, then the request is processed the next day and you receive the funds the day after that. This happens only on working days.
However, for funds with instant redemption feature (formally called Instant Access Facility or IAF), you get your funds near instantly (via IMPS). It even works on off-market hours and weekends!
Pro Tip: If you hold multiple Liquid Funds in your portfolio, you can redeem 50,000 INR from each of them instantly! This increases your liquidity and also reduces AMC risk to an extend. Start with one, and once you figure out how it works, it’s best to add a second or third Liquid Fund to your portfolio.
Liquid Mutual funds with Instant Access Facility.
I wanted to list out all Liquid Funds that offer instant redemption facility. However at the time of editing the article I figured it might sound like a recommendation, even if I say “this is not a recommendation”.
So let me tell you how you might approach this:
- Not all Liquid Funds offer instant redemption.
- If you already invest in a mutual fund, check the Liquid Funds of the same AMC and check if they offer instant redemption. This will save you the trouble of signing up for a new AMC account. (If you invest via an aggregator like Coin or Groww, this doesn’t matter.)
- You can use screeners like this one (no affiliation, not a user either) and find all the Liquid Funds on offer. There are 44 funds at the time of writing.
- Ignore the last one year or three year returns, doing that makes no sense since it’s all point to point returns and your returns cannot be predicted based on past data.
- Pick an AMC that you are comfortable with. Check their website to see if they offer instant redemption feature.
- Most AMC’s that I know have a separate section for instant redemption. Make sure you choose the right redemption process to access funds instantly.
Remember, Liquid Funds are never FD replacements!
You simply cannot compare a bank Fixed Deposit and a Liquid Fund. Nor should you use a Liquid Fund instead of a FD.
There is no other financial instrument like a FD. It’s easy to understand, it’s easy to invest and it offers peace of mind. You exactly know the return you are going to get BEFORE you invest your money. Your money is insured up to a certain limit. An FD is one of the safest investment instrument in India.
This shouldn’t scare you from using a Liquid fund, every instrument has a place and purpose and it’s up to you use to choose wisely. There is a plethora of content available for you to learn more.
I am a WordPress product developer and creator of Image Attributes Pro. I am passionate about solving problems and travelling the world.
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