There are various planned short term financial goals, including purchases, insurance premiums, or expenses. Investors can consider liquid funds to set aside money for these purposes. Liquid funds invest in debt instruments with maturity less than or equal to 91 days and offer market-linked returns. While comparing performances of schemes is important, there are other factors like the quality of credits, portfolio, costs and withdrawal conditions that also need to be considered.
Understanding Liquid Funds
Liquid funds are debt mutual fund schemes which invest in debt instruments with a maturity period of 91 days or less. Liquid schemes typically include treasury bills, certificates of deposit, and commercial papers. Generally, the maturity period of debt instruments in liquid schemes is shorter than the long duration of debt funds. However, there are still some investment risks involved. The returns will depend on the underlying securities and the current short-term interest rates. Unlike bank deposits, liquid schemes do not offer assured returns.
Liquid Funds to Consider for Short-Term Goals
Investors can compare several schemes before deciding where to place their surplus money. The following funds offer options worth examining, subject to their latest portfolio details.
- Axis Liquid Fund: Axis Liquid Fund stands out through its established investment approach and focuses on short-maturity debt and money market instruments. Managed by an experienced fund management team, the scheme aims to provide liquidity while keeping interest rate risk relatively low.
- HDFC Liquid Fund: One of the large liquid fund schemes with a consistent past performance and competitive expense ratio, along with good portfolio quality.
- ICICI Prudential Liquid Fund: This fund maintains a substantial asset base and emphasises portfolio quality, hence giving investors a chance to look at the scheme for liquidity purposes.
- SBI Liquid Fund: This fund follows a structured risk management approach and delivers liquidity through the facility of same day/next day redemption, subject to certain terms and conditions.
- Edelweiss Liquid Fund: This scheme invests in short maturity securities like treasury bills and commercial papers and emphasises portfolio quality and liquidity.
These funds provide options for comparison, but none suits every investor or financial requirement. Their portfolios, expenses, and risk levels may change over time.
Factors to Check Before Selecting a Liquid Fund
A liquid fund can be a good option for short-term funds. The returns are subject to market conditions. Although some of these schemes allow you to redeem instantly but there could be limits and conditions. It is important to look at the usual redemptions.
- Credit Quality: Investors should check the ratings of securities held within the scheme’s portfolio. Lower-rated instruments may offer higher yields, but they also carry greater credit risk. Issuer concentration and the portfolio’s overall rating profile also deserve attention.
- Expense Ratio: This is the annual costs incurred by a mutual fund scheme. Investors would need to consider this as it reduces the asset base. Direct schemes generally tend to be cheaper as they do not have a distributor’s commission.
- Portfolio Maturity: Liquid funds can have assets with varying maturities; however, you should look at the maturity & duration profile of the scheme in the latest factsheet.
- Redemption: You will need to consider the cut-offs, settlements and scheme conditions. There may be a exit load if units are redeemed within the first 7 days. Please ensure that you understand the redemption conditions currently in place.
- Consistent Performance: It may be useful to look at how the scheme has performed over different time periods. However, this does not guarantee any future performance or that the scheme will perform better than others.
Matching the Fund to the Financial Goal
The time available before an expense should influence the investment decision. If you need money a few weeks ahead, it is better to keep it in bank accounts so that you do not risk any critical amount by investing in market-related instruments. Those with flexible timeframes can look at liquid funds as they offer liquidity. However, the quality of the funds, costs, and how easily you can access your money will need to be considered. If you are looking to invest for longer, you might want to investigate a different type of debt fund. You should never use a liquid fund as an emergency fund as they are not easily accessible like cash in bank accounts.
Conclusion
Liquid funds are useful instruments to manage your excess funds for short term financial needs. However, they still have credit risk and market risk associated with them. While investing in liquid fund schemes, investors should review expense ratio, quality of portfolio, tenure, and repurchase terms. The Axis Liquid Fund is a strong option to consider when comparing schemes for short-term financial goals. Axis MF provides detailed factsheets and portfolio disclosures, helping investors make informed decisions.
