How to select the best liquid funds

The world is slowly recovering from the global pandemic of Covid-19. Trade, economy, livelihood, employment, and health among other things were affected globally. Income generation avenues plunged but expenses did not see similar decline. Instead as the virus spread, expenditure on health & wellness soared. With sudden loss of job and lack of proper financial planning, it became difficult to manage the growing expenses. Now with countries and cities opening up, but the threat of another wave not entirely dismissed, people have understood the need for financial planning.

Liquid mutual fund can be your first step towardsapt financial planning. A sub-category under fixed income mutual funds, liquid mutual fundshould be consideredby investors as a contingency fund. It could be considered in lieu of a savings account to park surplus money. Many first-time investors use liquid mutual funds to enter the market and eventually invest in equity funds via systematic transfer plans or STPs.

Liquid mutual fund aims at capital protection along with generating returns at relatively low risk.It generally invests in high-quality short-term money market instruments like treasury bills, commercial papers, with maturity no more than 91 days. Liquid fund investments are thus considered safe & bear low risk in comparison to other categories. . A few asset management companies provide instant redemption option up to Rs. 50,000 or 90% of the investment, whichever is lower.

A liquid mutual fund, like any other mutual fund carries risk albeit low. With maturity not exceeding 91 days it makes the fund less prone to interest rate fluctuations. They do not experience a lot of volatility making them low risk funds.Capital protection with reasonable performance is the objective of a liquid mutual fund. Industry wide average performance of liquid mutual fund currently ranges from 4% to 6%;the range couldchange according to market yields.

SEBI has set a graded exit load structure for liquid mutual funds. Graded exit load on redemption is as follows:

Redemption DayExit Load
Day 10.0070%
Day 20.0065%
Day 30.0060%
Day 40.0055%
Day 50.0050%
Day 60.0045%
Day 70.00%

There is no exit load on the liquid mutual funds post 7 days of investment.

A liquid mutual fund can become your go to provision at the time of parking surplus cash, making payment/investment in the future, creating a contingency fund or while facing a liquidity crunch. Features like instant redemption, low risk and high liquidity makes it a good case for investment. Past performance is not an indicator of future performance and performance alone should not be the sole factor for investing.

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