Best Liquid Funds Returns in India

How do Liquid Mutual Funds Work?

To understand how liquid funds operate, you must first know where they invest and how they generate liquid fund returns.

Where do Liquid Funds Invest:

A best liquid funds in India will typically invest in short-term, high-quality credit-quality securities. SEBI's recent set of guidelines has helped to reinforce these fund features. Liquid funds can only invest in listed commercial papers, and their overall exposure to a sector is limited to 25%. They are not allowed to invest in risky assets defined by SEBI regulations.

These standards are intended to limit credit risk or the risk of default by the company whose papers the liquid fund holds.

Additionally, mutual fund liquid fund must invest at least 20% of their assets in liquid products (cash and cash equivalents such as money market securities). This ensures that they can meet any redemption demands as soon as possible.

Earnings Sources:

The best liquid funds to invest earn most of their money from interest payments on their debt holdings, with only a small portion coming from capital gains. This is a distinguishing feature of liquid funds, so let us examine it in greater depth. Bond prices rise when interest rates fall. Bond prices fall when interest rates rise. Long-term bonds exhibit a stronger negative relationship between bond prices and interest rates.

This means that the longer a bond's maturity, the more sensitive it is to changes in market yields. Because a mutual fund liquid fund only invests in short-term securities, its market value is unaffected by changes in interest rates. This means that liquid funds have no substantial capital gains or losses. Liquid funds frequently outperform other debt funds in a rising interest rate environment because their interest earnings are increasing, and (ii) their market values suffer only to a limited extent due to capital losses. In market parlance, liquid funds have a very low-interest rate risk.

Who Should Consider Investing in Liquid Funds?

Investors with a short-term horizon:

Because the liquid mutual funds invest in securities with comparable maturities, liquid funds are best suited for those with an investment horizon of up to three months. Investors with a longer time horizon, say six months to a year? Should invest in liquid funds with a slightly longer duration (say, ultra-short duration funds) in order to earn higher returns.

Bank deposit investors include:

Investors who keep their excess best liquid funds in India in bank deposits can benefit from liquid funds in two ways: increased withdrawal flexibility and higher returns. A traditional bank fixed deposit locks funds in for a set period of time and imposes an interest penalty on an early withdrawal.

On the other hand, short term liquid funds provide flexible holding periods with simple exit options. Money in bank savings accounts can be withdrawn anytime, but the interest rate is only around 3% or 4%, which is lower than the 5%+ typically earned by a liquid fund.

Investors who wish to maintain Contingency Funds:

Liquid funds aim to provide liquidity and safety while outperforming fixed deposit returns. As a result, investors can place an emergency or contingency corpus in a liquid fund with the confidence that it will be safe and redeemed when needed.

Investors who need to park funds temporarily:

Liquid funds are cash management products intended to keep your money safe while earning a small return. As a result, a large sum of money, such as a bonus, property sale, or inheritance, can be temporarily parked in a liquid fund until the investor determines how to invest the corpus.

Medium for Investing in Equity Funds:

Investors can hold funds in a liquid fund and use an STP to route investments into an equity fund automatically. This allows them to invest in equity on a regular basis while the corpus in the liquid fund earns consistent returns

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