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Why is a Liquid Fund Important and How Can One use a Liquid Fund?


Liquid funds are debt mutual funds that invest your money in very short-term market resources such as treasury bills, government securities and call money. Such funds can be used by investors to park their money in instruments up to a maturity of 91 days, usually for a period of 1 day to 3 months. Top liquid funds can also be used when you have sudden cash flow that can result in a huge bonus, real estate sales and so on. Most equity investors use liquid funds to schedule their holdings in equity mutual funds through a systematic transfer plan (STP), as they believe this strategy can produce higher returns.

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You can invest in liquid funds online

You can apply online on their website to invest in liquid funds or visit their office to fill the required form to complete your KYC. You do not need to do this again when having KYC. KYC compliant investors can also start investing through online platforms. You can use your Demat account to invest in a mutual fund or through your stock trading account.

A liquid fund is a low-risk investment that generates capital gains on fixed deposits at different interest rates at the same interest rate. It is also suitable for investors with short-term financial goals.

Note: Liquid funds are suitable for short-term goals, not for beyond one year. Invest only the amount you will need in the coming years. They are not ideal for wealth creation. If your goal is to create assets, then it would be a better investment idea, in the long run, to start a systematic investment plan (SIP) in equity or balanced funds.

Is there a risk of investing in such a fund?

In the category of mutual funds, liquid funds are less risky and less volatile. It is because they typically invest in high credit rating (P1 +) instruments. The net asset value of such funds refers to the change in the amount of income earned, including holidays.

Liquid funds covered under debt mutual funds

  • Treasury bills (T-bills issued by the government, maturity not exceeding one year, usually -91, 182, 364 days) (liquid funds only take 91 days T-bills)
  • Certificate of deposit (CD); Commercial Papers (CP) (Issued by Companies)
  • Other Money Market Funds

Some of the benefits of a liquid fund that will help explain why a liquid fund is important:

Taxation: After three years of successful investment, long-term capital is applied to the funds. Also, the index value has been set at twenty percent.

Higher returns: Compared to fixed deposits, these provide higher rates of return.

Risk Factor: Due to their shorter maturity time frame, they are less volatile.

Use Better return: Instead of depositing money in an account for savings. For short periods, you can invest in them and get better returns. There is no time for lock-in or lock-out.

Easy redemption: It is easy to withdraw money from liquid funds, which you can do within 24 hours.

Interest rate: Liquid funds carry the lowest interest rate risk among debt funds.

Why liquid fund is important

Invest for better returns: Returns are not assured because the performance of the fund depends on how the market performs compared to fixed deposits that are not market-based. Shareholders with better returns would prefer to invest in liquid funds rather than fixed deposits.

Great investment tool: It is a perfect tool to handle the extra money required to use at any time. It provides better returns than bank savings and in some cases, much higher than FD.

Give more returns in a short time: If you want to invest your excess cash in a debt mutual fund scheme for a short time, this is an acceptable low-risk option. In Top liquid funds, fund managers invest in highly liquid money market securities with short-term horizons of up to 91 days (i.e., those that can be easily converted into cash).


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