You may have some money in your bank account. It is lying idle. You don’t need it immediately. You are waiting to spend it in a few weeks or months. But a regular savings account does not offer you much return. You are earning a very meager return. It is as if your money is sleeping. There is a smarter way to put that money to work. It is a liquid fund.
A liquid fund is a mutual fund. It is a very secure place to hold your surplus money. It is a good choice for mutual funds investment in india. Liquid funds are unique. They are not like all other mutual funds. They are designed for a short duration. They are not to save money for decades. We will discuss why they are a good option. We will discuss when you should not use them.
What Are Liquid Funds?
A liquid fund is an easy location to hold cash that will be required in the near future. It is a secure investment, as the money manager gathers funds from multiple people and invests them in money market instruments that are not similar to stocks or shares in companies. These instruments return the money within a short time, say 91 days or less. This regular flow of money ensures that the value of the fund does not change much and is not at high risk of loss. Liquid funds are an intelligent option for short-term requirements, when you are not prepared to invest in riskier investments. They are an easy and very important tool to enable you to earn more on your savings. Liquid funds are a useful and secure choice for those who have to keep money in an emergency situation without losing money.
Liquid funds work on the very simple principle of making returns on money in a hassle-free manner.
Step 1: Pooling of Funds
Several individuals pool their money in a liquid fund, which is handled by an expert fund manager. The fund manager takes care to invest the collective money.
Step 2: Investment Strategy
The fund manager invests the pooled money in different secure and short-term financial products, such as:
- Treasury Bills: Government loans for the short-term.
- Commercial Papers: Loans to large companies for the short-term.
- Short-term Bank Deposits: Risk-free deposits with higher returns than ordinary bank deposits.
These are liquid investments that can be quickly sold and that offer higher returns with safety.
Step 3: Growth of Fund Value
The worth of the liquid fund, which is called the Net Asset Value (NAV), grows slowly over a period of time. Unlike other types of mutual funds, the NAV grows slowly but steadily without sudden jumps, and investors can witness their entire money increasing on a day-to-day basis.
Step 4: Quick Access to Funds
The investors are able to withdraw their funds easily, usually within one day, simply by asking the fund manager. This aspect is highly appealing in terms of liquid funds versus other mutual funds, which can take longer to withdraw.
Liquid funds provide an easy and efficient means for investors to make a small profit on their funds without sacrificing quick access to them. The fund manager takes care of the intricacies, and the investor can reap the benefits of a stress-free investment.
Why Liquid Funds Make Sense?
Liquid funds have some excellent advantages. The advantages make them a wise component of an individual’s money plan.
- Safety. They are extremely safe. The risk of losing your money is minimal. The money is invested in things that are not risky. The worth of the fund is stable. It doesn’t fluctuate up and down like a stock. This provides you with peace of mind. You know that your money is safe.
- Quick Access. You get your money very quickly. In most cases, you will receive your money in one day. That is a very positive aspect. In case of an emergency, you can access your money. You do not have to wait for a long time. You do not have to sell a stock and then wait days. Your money is always available for use. No Lock-in Period. There is no specific period you have to leave your money in the fund. You can invest it today. You can withdraw it tomorrow. You can withdraw it next month. This provides a lot of flexibility. You can use it for whatever short-term intention you have. You can use it to save money for a holiday. You can use it to keep money available for a car down payment.
- Greater Returns. They typically provide a higher return than an ordinary savings account. A savings account may pay you 3% or 4% per year. A liquid fund may pay you more. What this means is that your money increases slightly faster. Not a great amount. But better than having your money in a savings account. It is easy to make more money.
Liquid funds are not for becoming rich overnight. They are for keeping your money safe. They are for earning a bit more on your short-term savings.
Short-Term Funds vs. Long-Term Mutual Funds
- Liquid funds are good for short-term goals because they give a steady return. The best mutual fund distributor in india, on the other hand, are better for the long run.
- Mutual funds are used to save for long-term goals, like college or retirement.
- Liquid funds put their money into stocks, which are riskier and whose value can change.
- Safety is the aim of a liquid fund, whereas growth is the aim of a long-term mutual fund.
- Liquid funds cannot be used for long-term plans, and must not be utilized for goals 10 years or 3 months away.
- Liquid funds are another instrument for long-term investment.
Last Words on Liquid Funds
Liquid funds are a smart and easy way to handle your money because they give you a quick return on short-term spending. They’re safe, quick, and you can get your money back at any time. Some people may not be able to use them, but they can be a useful part of a smart money plan. Start with a small amount and take it out when needed. If you have surplus funds in your bank account, a liquid fund is an easy initial step to begin earning money on them.