LIQUID FUNDS
LIQUID FUNDS
What are liquid funds?
Liquid funds are open ended schemes that invest in debt and money market instruments with maximum maturity of up to 91 days only. Hence, the average maturity of a liquid fund is equal to or less than 91 days. This strategy helps in mitigating risk arising out of interest rate volatility, provide high liquidity to portfolio and generate stable income.
Are there risks in investing in them?
Liquid funds are categorized as low risk products from liquidity and interest rate risk perspective. This is because they hold very short term instruments where the chances of interest rate fluctuations are less. Returns on these schemes fluctuate much less compared to other debt funds.
The probability of the credit risk i.e. the risk of default is also low due to short maturity of investment portfolio. The credit risk is further mitigated by investments based on evaluation of credit fundamentals such as outlook on the sector, parentage, quality of management and credit ratings.
What is the difference between liquid and other debt funds?
Liquid funds are short term investment products ideal for parking surplus money pending deployment or for meeting contingencies. Since liquid funds invest with short duration maturity, volatility in such funds is low. Other debt funds like gilt funds, income funds invest in a range of debt and money market instruments with restrictions on maturity as specified in their scheme information documents.