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Liquid Funds: A simpleton that we conveniently ignore at our cost!
March 15, 2011

Introduction to Liquid Funds

Author : Rajesh Krishnamoorthy

 Liquid Funds: A simpleton that we conveniently ignore at our cost!


I get about 7% on my savings money! Yes, please read again – I get about 7% on my savings money! And we all know that our basic savings bank account provides only 3.5%. So, the natural question – How have I doubled my return on basic savings?

I have been a strong advocate of getting your money to beat inflation. When all things around you become dearer (costlier) and your money doesn’t keep pace with this increase in cost, you are not only doing disservice to your future but also punishing yourself for all the effort you have put in the past to generate this income. The closer you are to overcoming the effects of inflation, the better you are at making your money sweat it out for you.
We have all been wisely advised to keep at least a few months of our salary in our savings account. This is essential to fight any unexpected requirements that may come up in our daily lives. However, what if you had an equally convenient option to park your savings money in another well regulated, transparent, easy to understand, low risk product? A mutual fund!

Dear reader, I am talking of the simpleton – Mr. Liquid Fund! He has another name too, Mr. Cash Fund! A Liquid or a Cash fund is built on three tenets – high liquidity, low risk, stable returns. Think about it, isn’t this but, what you get in your savings account too? Of course, I have to emphasize here that you are guaranteed 3.5% by your bank, whereas, any mutual fund in our country cannot guarantee returns on their products. But the question I ask myself and my family members is – how important is guaranteed returns when you know that the risk you take is very low?

I bring you to another fundamental rule in investing your money – if the incremental risk one takes isn’t as much and the reward one can expect from that investment decision is way more than what one gets at present, one should take the plunge! Any investment carries risk, but the bigger question you need to ask is “How much risk?” Post May 1, 2009, SEBI regulations have ensured that liquid funds do not invest in underlying instruments that have more than 91 days to mature. This provides a strong foundation for minimal interest rate risk.

For the next three to six months, our economy is expected to witness great hunger for overnight and short-term money (this is what the investment world calls - tight liquidity). In conditions of tight liquidity, there is more demand for cash but less supply of the same. Therefore, the most commonly used resort by our banks to manage this shortage is to go and borrow money from the Reserve Bank of India (RBI). When the banks do such overnight borrowing, the investment world calls it Repo. Whenever you get to read that the Repo volumes are high, it means that there is shortage of overnight money in the financial markets. This presents us with an opportunity to make our savings money sweat it out a little more – and that can be achieved by investing into liquid funds. The mutual fund industry can present over 50 different liquid funds for you to choose. Buying them today is a breeze with many online platforms. These funds have no entry or exit loads and you are free to take out your money any day after your investment. For those of you who are a bit more savvy, ultra short term debt funds could be your logical next step.

If you want to promote a noble cause, donate the extra income you generate from liquid funds as compared to your savings account to a good charity. Are you ready?


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.

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