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What is Liquid Mutual Fund?

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Do you prefer coffee? And when you think of coffee, you usually think about the coffee served hot with milk and sugar, which is the most popular form of coffee in India. However, as you now know, coffee can be of various types like Cappuccino, Mochaccino, Latte, Instant, Filter, Hot, Cold and Black, just to name a few.

But why are we discussing coffee? Well, this brings me to our main question- What is Liquid Fund?

When you google about mutual funds, you might come across a few popular options. Similar to our coffee example, mutual funds are of various types like Equity, Debt, Sectoral, Index, Balanced, Goal-oriented, Exchange Traded Funds and more.

To understand what is liquid fund or how to open liquid fund account, first, let us know what makes this fund ''liquid".

Liquid Mutual Funds

As its name suggests, for liquid mutual funds, its liquidity is one of the crucial factors. Now let us think about what type of investments can provide you with ready liquidity during uncertainties.

Though equity investments can beat inflation, they can experience short-term market volatility. Therefore, short-term ready liquidity can be a feature of debt-based instruments. They offer the bearer a certain rate of interest along with the invested capital or principal after a particular duration.

Liquid mutual funds are specific types of debt funds that invest in securities of maturities upto  91 days. Since your money is not tied in instruments of longer durations, it can be returned back to you at short notice.

  • Hence the name "Liquid" because the money invested is available to you within a short span of time. They generally invest in government securities, commercial papers, treasury bills and other fixed-income securities. Liquid funds can be invested into with a very short time horizon of a month

Advantages of Liquid Mutual Funds

Now that you have a clear idea about what is liquid mutual fund, let us look at its advantages.

  • Strong Emergency Corpus

As discussed earlier, these funds are 'liquid' in nature and may be suitable investments for building a solid emergency corpus.

  • Low Expense Ratio

The expense ratio for managing these funds is generally lower than equity-based mutual funds. Kindly refer www.amfiindia.com for Total Expense Ratio of Liquid category Funds managed by various mutual funds.

  • Entry and Exit Loads

Not only these funds can be easily redeemed during emergencies, they also have a graded exit load structures. There are no entry loads.

Allocation to Liquid Funds in your Portfolio

You can allocate the money you might need for emergencies or as a contingency reserve to liquid funds. Typically, a certain amount equivalent to certain months of your current income can be the measure for a strong corpus. However, you may consider your risk appetite and other such factors after seeking advice from a finance professional.

How to Open a Liquid Fund Account

You can buy liquid funds online directly from a mutual fund website or via mutual fund distributors.

To sum it up, liquid funds are one of the ideal avenues to parking short term idle cash with an option to earn potentially tax efficient returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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