Liquid Mutual Funds: Meaning, Features, Benefits

They are highly liquid, and redemptions are processed within 24 hours or one working day, making them an ideal choice for keeping emergency funds.

Most liquid funds do not charge entry fees, and exit loads are not applicable if held for more than seven days.

They invest in short-term debt instruments maturing within 91 days. They carry low interest rates and credit risk.

Due to the short-term maturity of the underlying instruments, the Net Asset Value (NAV) remains stable.

You can invest a smaller amount of ₹500 and do SIP for building an emergency fund, or you can directly invest a lump sum of ₹5 lakh.

The bank's savings account usually offers 2% to 3% returns, whereas liquid funds can offer much higher returns.

Gains generated from liquid funds are taxed as capital gains, which can be lower than traditional fixed deposits if held for more than three years.

These funds invest in money market instruments, which are considered safer than any market-linked funds.

You can invest money for a few days, months, or even years. It depends on your choice and goals.

The expense ratio of liquid funds is usually below 1%, which does not impact the investor's overall returns.

The expense ratio is the annual fund management fee charged by all mutual funds. Liquid funds have a lower expense ratio because fund managers typically hold the securities until maturity after investing in liquid funds. Therefore, liquid funds do not incur additional management expenses, and AMCs charge a lower service fee.

Savings account deposits offer a 3% return, whereas liquid funds offer returns between 7% and 9%.Thus, these funds offer better returns.

Given the shorter investment period of up to 91 days, this means that liquid mutual funds are not significantly affected by market volatility. As the Net Asset Value of these funds remains steady, they are counted as low-risk investment options. However, you must remember that liquid funds are not risk-free, as their NAV can drop once any of the underlying securities' credit ratings drop.

Liquid funds have a three-month investment horizon and can be used to create emergency funds. They are highly liquid, like savings account deposits, and offer a decent return at lower risk. Therefore, plan your investments accordingly before investing in these funds.