CONCEPT – LIQUID MUTUAL FUNDS

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 CONCEPT – LIQUID MUTUAL FUNDS

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    • What are liquid mutual funds :  Liquid funds are a type of mutual funds that invest in securities with a residual maturity of up to 91 days. Assets invested are not tied up for a long time as liquid funds do not have a lock-in period. So they can sell quickly and encash. So, liquid funds are debt mutual funds that invest your money in very short-term market instruments such as treasury bills, government securities and call money that hold least amount of risk. These funds can invest in instruments up to a maturity of 91 days. The maturity is mostly much lower than that.
    • Why least risky : They are least risky or volatile among all mutual funds. Why so? (a) They mostly invest in instruments with high credit rating (P1+); (b) Unlike other funds, the NAV of liquid funds is not volatile as the only change in their NAV is mostly as a result of the interest income that accrues (these instruments are hardly traded in the market but are held until maturity). Hence, their NAV only sees a change to the extent of interest income accrued, everyday, including weekends.
    • What about returns : Exact amounts of return is not guaranteed as the performance of fund depends upon how the market performs. In case of fixed deposits, this is not the case as they are not dependent on the market. An investor looking for better returns prefers investing in a liquid fund over fixed deposit, but there is always a risk!
    • Ultra Short Term funds : These invest in securities with maturity above 91 days, and protect against interest rate risks. They may give better returns compared to liquid funds. These are one notch higher on the risk chart compared with liquid funds. These instruments may also be traded in the market. Hence, the NAV may swing in response to market movements, making it a little more volatile.
    • Differences : Two other differences between liquid funds and ultra short-term funds - 
      1. The exit load and 
      2. dividend distribution tax (DDT). Liquid funds do not suffer exit load while a few ultra-short-term funds may levy them for exits made immediately after investment (time for exit may vary between funds). 
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                                                                                                                                      PT's IAS Academy: CONCEPT – LIQUID MUTUAL FUNDS
                                                                                                                                      CONCEPT – LIQUID MUTUAL FUNDS
                                                                                                                                      Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!
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