Why liquid fund is a must in your portfolio
MUMBAI: What are liquid funds? Mutual fund schemes that invest in debt funds. It is a specialised scheme where the fund can invest only in instruments that mature in less than 91 days. Essentially, it reduces the interest rate risk and hence there is virtually no volatility.
“It is a basic mutual fund product with very low risk. It has even oneday holding period. To that extent, it is like a saving account offering higher yields than savings account. Many of the liquid funds are also rated by the credit rating agency with triple A,” said R Sivakumar, head of fixed income at Axis Mutual Fund.
Every mutual fundhouse should have at least one debt mutual fund, so there should be over 40 liquid funds, he said.
Which liquid fund should you opt for? “The differences are very small. It may also be the case that many investors choose to invest in the same fundhouse where they have invested in. For instance, if they are doing a systematic transfer plan into equity, you may choose to invest in a liquid plan of the same fundhouse ,” said Sivakumar.
Why should you have liquid funds in your portfolio? “Liquid fund is a substitute to your savings account. We tend to leave a large amount idle in the savings account, especially when we haven’t decided on where and how to use it,” said Nisreen Mamaji, certified financial planner and founder, Moneyworks Financial Advisors. When you get your salary, after paying your EMI and monthly expenses, whatever is left keeps lying in the savings account, she said.
“If you have registered for SIP, it is good. However, many tend to keep money in the bank account for an upcoming holiday, which assuming would be two-three months down the line. If it doesn’t happen, you should transfer it to a liquid fund,” said Mamaji.
Instead of leaving the money in a savings account and getting an annualised return of 3.5-4%, you can opt for a liquid fund, where you could get 6.5% annually, she said. That would also give you enough time in case the plan doesn’t materialise. Also don’t leave the money in a liquid fund for a long time.
Another reason to have a liquid fund is to park your money for emergencies.
“You should opt for a liquid fund for your emergency kitty. For instance, if you have a job loss, you can use this kitty,” said Mamaji.
Remember that liquid fund is for short-term purposes. For long-term investment, there are other mutual fund and financial instruments you can consider.