Three Smart Applications of Liquid Funds
Once exclusive to corporates for managing working their capital, liquid funds have since found thousands of takers within the retail and high net-worth investing community over the past three years. According to data from AMFI, liquid fund folios held by individuals tripled from 3 Lakhs to around 9 Lakhs in the three years between September 2014 and September 2017.
Liquid Funds are a special category of debt mutual funds that invest in bonds that are maturing in the very near future. Typically, bonds held by liquid funds have maturity values of 15 days to a month, thereby all but nullifying ‘interest rate risk’ or the risk of your fund value falling in response to rising economic interest rates, bond yields, or both. Here are three smart applications of Liquid Funds to your day to day finances.
Building an Emergency Corpus
Financial Advisors recommend keeping a minimum of six month’s fixed expenses in an easily accessible, low exit-cost financial asset that can be accessed as and when required, with ease. Such a fund is critical for your financial wellbeing - since emergencies such as layoffs, business failures or costly health related issues can crop up out of the blue, leaving you high and dry. Liquid Funds are ideal for the purpose of building an emergency corpus, since they provide steady returns with one-day liquidity. These days, redemptions can be made electronically without the need for paperwork – and up to Rs. 50,000 can be redeemed instantly from your liquid fund into your bank account using the Mutual Fund company’s website or app.
Earmarking Money for a Certain (Short-Term) Purpose
Liquid Funds are ideal for putting your money ‘out of sight and out of mind’ just in case you’ve got a spend planned a short while later. For instance - you may be planning the purchase of a new car, or a vacation, a couple of months down the line. Leaving the funds lying in your savings bank account is a tricky affair, as it’ll inevitably be consumed for some pressing need or the other! Instead, you can quickly move the earmarked moneys into a liquid fund folio, ensuring that it earns better returns than your savings account in the process. When you need to use the money, all you need to do is put in a redemption request, and the funds will return to your account by the next day.
Staying in Cash When Nothing Looks Investment-Worthy
The “FOMO” (Fear of Missing Out) syndrome drives many investors to ruin each year, as they haplessly chase trends and burn their fingers in the process. Examples are – buying into multi-bagger stocks after they’ve already had their golden run or investing into real estate after a rally is complete, and when a glut of oversupply has already built up within the system. Oftentimes, you’ll find that nothing really makes the cut when it comes to justifying an investment of our hard-earned money. During these times, liquid funds can be the perfect safe haven for your money. Sit tight and wait patiently for trends to reverse, and earn inflation-beating returns from liquid funds while you do so. If you’ve got a long enough time horizon with your money, you may start a Systematic Transfer Plan (STP) from the liquid fund to more aggressive, equity-oriented ones too, thereby protecting yourself from the risk of investing all your money at or near market peaks.