How to do liquid fund Work?
The fund manager makes sure that he invests in securities with a maturity of 3 months or 91 days. This is because the primary objective of liquid funds is to provide high liquidity and low risk along with reasonable returns. A fund manager selects only highly rated debt securities and invests amounts in consonance with the investment objective of the scheme.
Here are some reasons to consider liquid funds for investment:
Ideal for short term goals
Investors can invest in liquid funds to meet their short term goals. Everyone has some goals that they want to achieve through their investments. That is why they are emotionally attached to their investments. Investing in liquid funds can be ideal for short-term life goals such as home renovation or making the down payment for a luxury car or planning a short vacation.
Ideal for building emergencies
Anyone who builds their investment portfolio based on mutual funds should always have an emergency fund to deal with life’s contingencies. This is because if you have equity funds in your portfolio, such mutual funds are volatile in nature. There is a need to stay invested in such funds for the long term if they want to survive the volatility of the market in the short term. However, at the time of financial emergency, one needs some sort of backup and it can be a good idea to create an emergency fund using liquid funds. Liquid funds are highly liquid in nature. One can redeem his mutual fund units at any time. They do not have any lock in period. This means that one need not commit to their investments for a particular time frame. Liquid funds also offer partial withdrawals if you do not need the entire amount in your emergency fund to meet a financial emergency. Investors can redeem the required number of units and convert them into cash while the remaining investment amount can continue to be invested.
Choose from Direct Plan and Regular Plan
There are two investment plans on offer for anyone looking to invest in liquid funds. Investors can either go with Direct Plan or Regular Plan depending on their preference. Let us understand the difference between these two. Direct plan is a mutual fund scheme available across fund houses. One can buy direct plans by directly visiting the fund house or by logging on to their website online. Since the investor is buying the mutual fund scheme directly from the fund house, the expense ratio is lower for holding liquid funds with direct plans. A regular plan on the other hand is available through a third party such as a broker, aggregator or fund advisor. There is no need to buy a regular plan directly from the fund house. However, the expense ratio of owning a regular plan is comparatively high. This is because the third party selling the liquid fund charges a commission to the fund house for selling the fund on their behalf. This commission fee is recovered by the fund house by charging a higher expense ratio to the regular scheme investor. Therefore, investors should be careful while deciding between direct and regular plans.
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Mutual Fund investments are subject to market risks, read all scheme documents carefully.