Liquid fund schemes and other ways for short term
In case of liquid fund investors get the flexibility to redeem any time. The redemption requests for these funds are processed within 24 hours on business days. Some fund houses also offer instant redemption facility.
Debt mutual funds variants for attaining short-term goals
Sameer a salaried individual recently received his Diwali bonus. He is in dilemma as to where he should be investing the bonus amount since he might need money for the short-term goals including funding his son’s class fees, health care expenses of his ageing parents and investing some in emergency funds given the pandemic woes. So, he needs an investment avenue which scores high on liquidity and safety of the capital with descent returns. Earlier, he would invest in saving bank deposit or bank fixed deposit but given the lower interest rate scenario in the economy to fight the pandemic blow, he feels he should explore other avenues as well. So, his friend Pradeep told him to consider debt oriented mutual fund variants. Like Sameer we all too need investment avenues for our immediate goals and hence in this article we delve into mutual fund avenues such as liquid funds and other shorter maturity debt funds such as overnight funds, ultra-short-term funds, low duration and money market funds which can aid to meet goals of shorter horizon. While these are one of the good options for the short-term goals and emergency needs, they are not completely risk free they are subject to interest rate risk and credit risk to name a few. So before investing, doing a due diligence of the fund and your own risk profile is must.
Liquid funds are the open-ended debt mutual funds which invest in debt and money market instruments with a maturity of 91 days. The underlying instruments of these funds are certificate of deposits (CDs), commercial papers (CPs), term deposits, call money, treasury bills and so on. Liquid funds are highly liquid, relatively less risky with reasonable returns. Liquid funds unlike bank fixed deposit don’t have any lock-in period. In case of bank fixed deposit, the money locked for few days to months and premature withdrawal attracts penalty. In case of liquid fund investors get the flexibility to redeem any time. The redemption requests for these funds are processed within 24 hours on business days. Some fund houses also offer instant redemption facility. Investors can redeem the units subject to payment of the exit load. Liquid funds do maintain a lower expense ratio which typically enhances chances of higher returns for investors.
Apart from the liquid funds investors can consider investing in some of the other shorter maturity debt funds as listed below.
These funds enable investors with low to moderate risk profile to park their short-term surpluses for the near term goals. These funds are highly liquid in nature and can be good alternate to traditional avenues wherein the investment amount can be easily withdrawn. In terms of performance, the average returns of majority of these funds are 2% for 6-month time period and 3 to 5% for the 1-year period ended November 8, 2021. (Table below shows average category returns).
The above table gives a broad idea about the returns of these funds. Investors need to carefully evaluate the fund performance vis-à-vis benchmark and peers before investing. Investors should note the returns on shorter maturity debt funds have fallen in the recent time with the reduction in the interest rate (repo rate) by the Reserve Bank of India (RBI) from 7% in 2015 to 4% in 2021. Even though returns are dwindling, these avenues do offer relatively safety and liquidity and can be used investors with a short-term goal. Note, debt-oriented funds are market linked avenues and do not offer fixed return like the traditional avenues. Hence, careful evaluation of the scheme related and personal parameters is essential before investing.