When you’re looking for short-term investment options that offer better returns than a savings account but without too much risk, the best liquid funds often stand out. They have become a go-to choice for investors who want to park surplus money for a few days or months. But before you put your money into one, it’s important to understand what they are, how they work, and whether they truly suit your financial needs.
Just like other mutual funds, liquid funds are managed by professionals. But their unique structure makes them different from other fund types. If you’ve been hearing about the best liquid funds but are unsure what they mean, this guide will help break it all down in a simple and clear way.
What Are Liquid Mutual Funds?
Liquid mutual funds are debt mutual funds that hold investments in treasury bills, commercial papers and certificates of deposit. Since they mature in just 91 days or less, these instruments help lower the rate of interest-rate risk.
These funds mainly focus on ensuring liquidity and preserving capital. People can choose to invest in these funds whenever they like and can also withdraw their money within one working day. For this reason, they’re known as liquid funds because they are simple to access and considered relatively safe.
Why Do People Like Liquid Mutual Funds?
Many people are choosing liquid mutual funds because of their advantages. The biggest concern for an investor is safety. Compared to other types of mutual funds, liquid funds tend to be the least risky.
Since they do not hold long-term bonds, changes in interest rates do not greatly affect them. A short maturity period helps investors avoid the risks of changes in the market. Even if you’re new to investing or have been doing it for years and want a secure place to park your extra cash, the best liquid funds can serve your needs.
Why Should You Consider Liquid Mutual Funds?
Here are some explanations for why liquid mutual funds are preferred over regular savings accounts or fixed deposits:
- Higher interest rates than savings accounts.
- You can easily liquidate your investments the same or the following day.
- This mutual fund has a lower risk than most others.
- You are free to switch at any time.
- It is best suited for emergency savings or saving for something in the near future.
For those who need to keep their money safe for a short time, the best liquid funds are a reliable option that still allows their money to grow.
Are Liquid Mutual Funds Safe?
While liquid mutual funds are generally safe, there is still a small risk involved. The greatest risk is credit risk, which occurs when the assets in a fund are either defaulted or downgraded. While fund managers generally shy away from low-credit instruments, there is still a degree of risk involved.
Despite the low risk, interest rate risk is still present in short-term debt funds. When selecting the best liquid funds, always examine what the funds hold and how creditworthy these instruments are. Safety should always come first.
Final Words
If you are new to mutual funds or simply want to keep some extra cash somewhere safe, best liquid funds are a good option. Review the scheme’s details, decide what you want to achieve, and choose the best option. Sometimes, your short-term money could also use a smart home.
