What are the Benefits of investing in a liquid fund?

Liquid funds are a category of debt mutual funds which invest in securities of a maturity period of up to 91 days. Investing in these funds can help you generate a higher rate of return than a bank savings account and meet immediate liquidity needs. Read on to know the various advantages of investing in such funds.

1. Helps Build an Emergency Corpus An emergency can strike anytime and hence it’s financially prudent to build a corpus for the same. A sudden job loss, a medical contingency, temporary disability due to an accident, etc., are events that can put a break on your regular income. To meet daily expenses and otherwise for such occasions, it’s important to build an emergency corpus equivalent to expenses of at least 6 months.Liquid funds are your best bet to set up funds for a contingency. You can easily redeem the units whenever required, with the money being credited into your account the next day. As the returns are higher than a bank savings account, you can create a large corpus that can help you tide over the situation with ease.{2D743194-97C2-43F9-BC28-AEC370801ECD}
2. Cushion from Interest-Rate Risk It is one of the risks associated with any investment and mutual funds are no different. This risk refers to the probability of declining value of an asset due to fluctuations in interest rate. Also, most debt funds which invest in bonds see a drop in their net asset value (NAV), when interest rate goes up.However, liquid funds cushion you from interest-rate risk as they invest in underlying securities that have a maturity period of 91 days. The longer the maturity period, the higher is the interest-rate risk. But this is not the case with liquid funds as the maturity period is quite low. While the chances of ruling out interest-rate risk are not absolutely zero, they are extremely low.
3. Provision for Making Annual Payments You can use liquid funds to save towards making annual payments such as insurance premium,admission fees of your children, undertaking a vacation, etc. Note that money kept in a savings account tends to evaporate quickly. Also, it’s prone to expenses on unnecessary items. In such a scenario, it becomes a little difficult to meet these annual commitments.However, by investing in liquid funds, you can easily build a corpus for these annual expenses without dipping into your savings. Also, you can have better control over your cash flow and inculcate a disciplined savings habit.

You can invest a lump sum in liquid funds or opt for a systematic investment plan (SIP), wherein a fixed amount is debited every month from your account and invested in your chosen fund. Before investing, check out the long-term performance of the fund across market cycles to make an informed choice.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.