Pros and Cons of Liquid Mutual Fund

Liquid funds are short termed income schemes that invest in money market instruments such as government securities, treasury bills among others. If you have idle money in your account, it is best to invest it in a liquid fund for short time periods.

Let us take an example, if you have to save for your son’s school fees due quarterly this is a good investment. Stock markets or equity funds are too risky a proposition for these important payments whereas bank fixed deposits will lock in your money for a long period and the returns will be low. Therefore, liquids funds are a good bet.

Liquid funds are dedicated funds for emergencies. The investor will also earn better than bank deposits. Many equity investors also use liquid funds to scatter their investments into equity mutual funds using the systematic transfer plan (STP), they believe this will get higher returns.

Financial advisors look at liquid funds to carry lowest risk as well as least volatility in the category of mutual funds. This happens because people generally invest in instruments with high credit rating. The net asset value of these funds sees a change to the extent of interest income accrued, including on weekends.

PROS AND CONS OF INVESTING IN LIQUID FUNDS

Pros

• No lock-in period
• Withdrawals can be processed in 24 hours
• No exit load
• Taxation benefits

Cons

• In a savings bank account, investments of up to Rs. 1 lakh are covered under deposit insurance. No such feature is available with Liquid Funds.

YOU SHOULD THINK OF MUTUAL FUNDS IF YOU:

• want to create a dedicated fund for emergencies
• have idle money to invest
• are looking to earn better than what you do from bank deposits, keeping in mind the fact that both are highly liquid in nature
• prefer short-term exposure
• prefer highest liquidity with the least risk

To summarise, liquid funds are a good platform to invest that would otherwise stay idle in an account. They work well for an investor as they offer reasonable returns, and seek convenience of liquidity over short term like any regular account. To know Consumer VOICE rating of top Liquid Mutual Funds, click here