Liquid funds

Liquid funds

Investing in liquid mutual funds is a good way to earn higher returns than traditional bank accounts while maintaining a high degree of liquidity. The advantages of liquid mutual funds make them an attractive investment option to investors looking for low-risk, high-liquidity, and higher returns on their short-term investments. However, conducting thorough research and considering all relevant factors before investing in any mutual fund is important. 

What are liquid funds? 

Mutual funds, known as “liquid funds”, invest in highly liquid money market products, including commercial papers, treasury bills, and certificates of deposit. These funds are perfect for investors who wish to make a decent return while temporarily parking their extra cash. 

Understanding liquid funds 

These funds invest in instruments that have a maturity of up to 91 days, which ensures that the investors can easily liquidate their holdings without any significant loss.  

Moreover, such funds offer higher returns than savings accounts. However, it is necessary to consider that these funds are not risk-free and are subject to market fluctuations. Therefore, investors should carefully analyze the fund’s investment objective, portfolio, and past performance before making an investment decision.  

Additionally, investors should diversify their portfolios and not rely solely on liquid mutual funds for their investments. 

Risks of liquid funds 

Liquid mutual funds are considered one of the safest investment options available. However, like any other investment, potential investors should know certain risks associated with liquid mutual funds.  

• One of the most significant risks is interest rate risk. As interest rates increase, the returns on liquid funds decrease, and vice versa.  
• Another risk is credit risk, which is the possibility that the security issuer may default on their payments.  
• There is also reinvestment risk, where the returns on the liquid fund cannot be reinvested at the same rate as before, leading to a lower return on investment.  

Before purchasing liquid mutual funds, investors should carefully assess these risks and, if required, seek advice from a financial advisor. 

Importance of liquid funds 

Liquid funds are an important investment option for those who prefer liquidity and stability. These funds make investments in short-term debt securities such as commercial papers, certificates of deposit and treasury bills.  

The primary objective of liquid funds is to provide investors with high liquidity while preserving their capital. One of the significant advantages of liquid funds is that they provide a higher return than traditional savings accounts with low risk.  

Additionally, they have no lock-in period, meaning investors can redeem their investment any time they require cash. This makes them suitable for short-term goals, emergency funds, and business working capital requirements. Therefore, investors must consider liquid funds an essential part of their portfolio to balance their risk and liquidity needs. 

One real-life example of a liquid mutual fund in Singapore is the DBS money market fund. This fund is managed by DBS bank and invests in high-quality short-term debt instruments that provide stable returns. The fund attempts to preserve capital and provide liquidity with minimal credit and interest rate risk. The minimum investment amount for this fund is SGX 1,000, with a low expense ratio of 0.25%. The DBS money market fund is popular among investors who want higher returns than savings accounts without compromising liquidity. 

Benefits of liquid funds 

• One advantage of liquid mutual funds is their low-risk profile.  
• A liquid fund has neither a penalty for early withdrawals nor a lock-in term like a fixed deposit. 
• Liquid funds adhere to debt taxes. You have the opportunity of indexation when you redeem after three years. Indexation drives up the cost of your purchase. Thus, your profits go off as your purchasing price rises, resulting in lowered tax liability. 
• In addition, liquid mutual funds offer higher returns than traditional savings accounts and fixed deposits. The returns on liquid funds are usually linked to prevailing market interest rates, typically higher than the interest rates banks offer on savings accounts and fixed deposits. 

Frequently Asked Questions