Liquid mutual funds are debt funds that invest in short-term yet high-quality debt and money market instruments such as treasury bills, government securities, certificate of deposits (CDs), and commercial paper, with maturities of up to 91 days.
Investing in liquid mutual funds can provide a great opportunity to optimise your financial situation. They offer the potential for stable returns with easier access in case of an emergency. You can use liquid funds to park your large corpus temporarily, maintain a contingency corpus, or for other short-term goals. These funds provide a certain degree of liquidity while also investing in higher-yielding money market instruments. Also, liquid fund returns are marginally higher than what you would receive from a fixed deposit or savings account.
Ways to invest lumpsum in liquid funds
Investing in liquid funds is similar to investing in other mutual fund schemes. You can choose offline or online means to make the lumpsum investment. Offline means submitting the application forms at a mutual fund house’s POA (point of acceptance), or its RTA (registrar and transfer agent). Digital channels involve making transactions directly through a mutual fund house’s website or mobile app.
But before you try to liquid fund investment, make sure you are KYC (know your customer) compliant. You can create your account at the eKYC portal of any KYC registration agency and apply for an e-KYC verification.
Steps to invest in liquid funds through an app and website
- Install the dedicated app. You can also login to your selected mutual fund house website
- Register your ID and password
- Provide your personal details
- Complete the PAN/Aadhar and biometric verification by following the on-screen prompts
- Navigate to the investments section
- Select ‘mutual funds’
- Choose ‘one-time lump sum’
- Decide how much you want to invest in the portfolio and start investing
Factors to consider while investing in liquid funds
-
Your investment goal
Before investing in a liquid fund, have a clear goal and timeline for your investment. Liquid funds are ideal if you have short-term goals such as maintaining a contingency fund, parking extra cash, a small vacation, or using it as a channel to systematically transfer funds to other investment schemes. The maturity tenure for these funds is up to 91 days, so if you are looking for a long-term investment, you should consider other mutual funds investment plans.
-
Historical returns
By observing how the fund has performed over various market cycles and comparing it against its category and benchmark, you can judge if it is a sound investment. Additionally, examining the track record of the asset management company (AMC) behind each fund is important as it reflects their expertise in managing funds
-
Portfolio diversification
Along with liquid funds, consider investing in different asset classes, such as stocks, bonds, or cash equivalents. This diversification helps to protect you against any unexpected market fluctuations. Furthermore, portfolio diversification can also help to maximise gains as investments are spread out across various sectors and risk categories which ensures that your portfolio does not overexpose itself to any one risk at a given time.
Closing thoughts
While it’s important to have equity funds as part of a well-rounded investment portfolio, it’s also wise to diversify with liquid funds. They may not offer the same high returns as equity funds, but they are a low-risk option that can provide stability and protect against market volatility. Plus, with online investing, it’s easier to invest any surplus cash — whether from a property sale, bonus, or hike in a liquid mutual fund for the short term.
