Liquid Funds

What are liquid funds?

Funds which do not invest any part of assets in securities with a residual maturity of more than 91 days are liquid funds. Currently, the average portfolio maturity of this category ranges between four and 91 days. These funds invest in short-term debt instruments with maturities of less than one year. Investments are mostly in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between 3 and 6 months.

Why invest in liquid funds?

These funds provide good liquidity, low interest rate risk and the prevailing yield in the market. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk. While liquidity is one factor of these funds, safe investments make them the preferred parking option for HNIs and corporates. Moreover, the maturity makes them relatively less sensitive to interest rate fluctuations, compared to other debt funds. For all these reasons, liquid funds are used as an alternative to short-term fix deposits. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. The minimum investment size in a liquid fund varies from Rs 25,000 to Rs 1 lakh.