During old times the banking sector had very few financial instruments where we could invest in. Fast forward 15yrs and there are so many options available. These instruments are available to the common man (retail investors) in the form of mutual funds, debt funds, liquid funds and many more. But today we will talk about investing in liquid funds and how it can be of advantage.
Definition of Liquidity
Liquidity in the financial term means the easiness to be converted into cash. For eg: Gold is considered to be highly liquid, which means that if anytime you want to sell it you can and it can be used as a commodity to exchange for items. Whereas real estate like land, apartment or commercial space is not liquid. Selling a real estate takes a lot of documentation and it cannot be used as a commodity too. The papers of a real estate need to be checked before it can be accept as an assurance. So any instrument that can be changed into cash very quickly can be called as Liquid instrument.
Referring above, it is understood that any fund that can give us cash to use immediately is called a liquid fund. Can we call our bank accounts as a liquid fund? We can say our bank accounts to be an example of a highly liquid instrument but it’s not a liquid fund.
What is a Liquid Fund?
A liquid fund is offered by an Asset Management Company in which you can invest the money. An Asset Management Company or AMC could be banks or private financial companies. The AMC collects money from many retail investors like us. They then take the total amount and invest in the predefined set instruments for 90 days or less. That is why it is less risky. Also, these instruments give better returns than banks.
But doesn’t bank do the same? Banks take our money and give loans, right? Yes, but we do not know where our banks invest the money in or how they are spending our money. That’s is why the interest rate a bank provides is far less than a liquid fund.
How liquid fund is better than banks?
In my monthly budget, I know the amount that I would need. I try to stay within that budget. The money that I need for the month should be in the savings bank account so that I can pay quickly for different services. A bank would pay 3%-4% for the amount kept in the savings account. If there is any surplus amount ranging from Rs.100/- and above I move it to my liquid fund. This gives me a low-risk place to store my extra cash while it can earn 6%-7% interest while it just sits there. Liquid funds cannot act like savings bank account because once I raise a request for withdrawal it can take up to a few hours for remittance to my bank account. This is where a bank account differs from a liquid fund. Bank accounts give money immediately but liquid fund takes time.
Liquid funds provide quick liquidity better than other mutual funds. Many mutual funds can take up to 3 days and have some amount deducted if you withdraw within the lock-in period. But if you are investing in liquid funds then you can withdraw the very next day too as there is no lock-in period.
Let’s summerise the benefits of investing in liquid fund:
- Money can be easily withdrawn.
- No lock-in period.
- Better interest rates of 6%-7%.
- Minimum investment amount set to Rs.100/-.
- Less durations of investments.
I am just wondering why I did not know about this earlier. I could have used it to make some wealth. Well, better late than never.