A Liquid Fund – What is it? 

When you get a clear picture about a liquid fund, its features, and the pros it has for investors, you will automatically have a basis to decide on for your investment. So, to get on with a definition of a liquid fund, it is a kind of mutual fund that invests your money in debt instruments. The goal is to generate returns for the short term and give investors as much less risk as possible. The majority of the best liquid funds tend to invest in debt instruments such as commercial paper, treasury bills, government securities, and the like. Liquid funds have short maturity periods, up to 91 days. As their name aptly suggests, the best liquid funds offer investors a great deal of liquidity, and still manage to protect the initial capital invested. 

Short maturity periods in liquid funds reduce market risks in terms of fluctuations in interest rates, and hence, investors stand to make higher gains. In case your money is just lying in a savings account, liquid funds can help you grow wealth.

Two Critical Features of Liquid Funds

The best liquid funds in India today offer investors liquidity and a safe haven to guard their principal amounts. Moreover, investors get to grow their wealth. These are the primary features of funds that investors base their investing choices on:

• High Degree of Liquidity

In case you wish to redeem units from a liquid fund, you can do so quickly and conveniently. Additionally, funds are redeemed in a day or two. This is the main reason why they resemble the liquidity aspect of money that remains in a savings bank account. 

• High Degree of Safety

Liquid funds invest your wealth in instruments of debt. With such instruments, your initial capital stays protected and you earn risk-free returns too. 

Corporations, firms, and businesses habitually invest in liquid funds as they ensure capital safety and liquidity. These are essentials that companies require, as well as investors too. In contrast, your wealth placed in a current bank account earns no interest whatsoever. In fact, your money loses value due to inflation. 

Selecting the Best Liquid Fund

The main purpose that liquid funds serve is to offer investors a short-term option for investment. Typically, if you are an investor who does not know where to park your capital, or is in between investments, you can opt for one of the best liquid funds out there. You will not consider investing in a liquid fund for the long term. If you wish to invest in a good liquid fund, you may compare the returns of several liquid funds on the market, and consider the following: 

• The AUM of a Liquid Fund

Assets under management (AUM) are crucial when you wish to opt for a mutual fund. Experts and analysts will tell you to find out the size of the AUM before you invest, as the AUM is the measure indicating any fund’s cash flow. This is true for liquid funds too, as a significant amount of AUM gives any liquid fund a cushion to withstand any factors that may weaken it.

• Credit Ratings of the Best Liquid Funds

High credit ratings of funds tell investors that funds are creditworthy and secure enough to invest in. If the fund holds a Triple A (AAA) rating, that means that the fund lends to borrowers with high creditworthiness. It also means that the fund will give investors returns in a timely fashion. 

• Expense Ratios

Liquid funds have expense ratios that are computed based on the expenses levied to manage the fund. If these are high, they are prone to cost you more as an investor, eating into any potential returns you may make. Therefore, choosing a fund with a low ER (expense ratio) is advisable. 

• Do Some Homework

While choosing the best among liquid funds available today, investors must do their homework and background research well. As with any kind of investment you opt for, choosing the best liquid funds entails a process of studying various funds on the market and their historical performance. You would do well to evaluate the fund managers’ success rates too, as this reflects the performance of the fund in question. 

Better Safe than Sorry

Going into any investment without studying the parameters to base your choices on is a bad idea. If you consider certain metrics to plan your investments, you are assured of making the right moves where your capital allocation is concerned. After all, investing should translate to you gaining returns and being protected to a large extent. 

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