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Liquid funds also known as liquidity funds, are the short term investment instrument. Many people choose this fund to get more interest rate compared to their bank savings account. Here are some of the things that you should know about the liquid funds. Do note that liquid funds functionality may differ from country to another. Also the market condition plays important role for the amount of interest being offered.



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Short Term

Liquid funds are not meant for the long term. You have to choose the liquid funds as an alternative to your savings bank account. If you get 1% of interest in your savings account. The liquid funds usually generate 4-6% per 390 days. Again this depends on the market and also the country in which you are investing. So usually the 1-2% more interest rate is possible with short term liquid funds. However you can't keep them for more. And you need to renew the investment each year.

Risk

The liquid fund don't invest into equity or the bluechip funds. So the amount of money that is into the fund is not as risky as equity. You need to make sure that however you are not risking much money for this fund investment. The amount of risk that you usually get from this fund is that your money gets less interest or negative interest. This depends on the market condition. So if you don't want to risk much money, then only keep the emergency funds in the liquid fund.

Returns

Most of the time the liquid funds get returns based on the market condition. And you should not expect much from them. As the liquid funds offer safety you may not expect much from the funds. Though compared to deposits in bank, the funds have good returns. You can take 1-2% compared even with deposits and savings account. If the economy is doing good then you can expect the interest rate to change. Even during the crisis, you may find that the liquid fund perform lot better compared lot of debt funds and bank deposits.

Why choose liquid funds?

Liquid funds are not meant to replace the high return investment funds. But they offer much better returns compared to savings bank account. You can think of using the funds for parking the money for 3 months or 6 months. Compared to parked bank savings, you get better return from it. There is no credit risk even for the low duration of the money parked. Daily NAV movement of those funds are extremely stable. So it makes a safe fund compared to debt fund. You can choose any random fund house and you'd find very narrow interest range difference in between them.

If you have very small duration for parking the money, then in such case liquid funds investment makes sense. Depending on the market condition and your countries fund houses, you can choose the funds. For those with volatile funds in their bank accounts, it helps if you choose the liquid funds over equity or debt funds.

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The liquid fund don't invest into equity or the bluechip funds. So the amount of money that is into the fund is not as risky as equity. You need to make sure that however you are not risking much money for this fund investment. The amount of risk that you usually get from this fund is that your money gets less interest or negative interest. This depends on the market condition. So if you don't want to risk much money, then only keep the emergency funds in the liquid fund.

Liquid funds are a low-risk investment option because they do not invest in equities or blue-chip stocks. They invest in short-term debt and money market instruments. So your money is relatively safe. However, the returns are small and can sometimes be negative depending on market conditions. That is why liquid funds are more suitable as part of an emergency fund rather than a long-term growth strategy because they protect liquidity and give you quick access without significantly affecting the principal amount. However, they are not suitable as a way to seek high returns or very large wealth creation.