How To Use Liquid Funds Smartly

When COVID struck and the RBI infused unprecedented amounts of liquidity into the markets in an effort to prevent an economic collapse, liquid and ultra-short term funds got the short end of the stick. Now, with the central bank’s effort targeted squarely towards curbing inflation and mopping up excess liquidity from the banking system, we are expectedly seeing liquid funds making a strong comeback – the annualised category average return from them as on 28th November ’22 was an impressive 5.8 per cent.

Chances are, you’ve probably heard of liquid funds before - these are a type of debt oriented mutual fund that invest into very short maturity fixed income instruments. Typically, liquid funds invest into short term borrowings that are due to mature in a month or less, and this eliminates volatility to a large extent by cutting the interest rate sensitivity associated with the fund. Here are three smart ways in which you can use Liquid Funds in your portfolio.

Building an Emergency Corpus

Given their essentially non-volatile nature, liquid funds are ideal for parking moneys that may be required in an emergency. The worst year returns for most top ranked liquid funds have seldom been below 3 per cent, and although the past 2 year returns have been disappointing at around 4 per cent annualised due to the reasons outlined previously, we are likely to see much better returns from this category of funds going forward, for the immediately foreseeable future. It would be prudent to put away some amount of your savings regularly in a liquid fund, as you can now redeem up to Rs 50,000 from each fund instantly into your bank account too. For your emergency corpus, Liquid Mutual Funds are a great option.

Systematic Transfer Plans

Liquid Funds are also an ideal passthrough vehicle for your Systematic Transfer Plans (STP’s). STP’s are an automated instruction that transfers a fixed sum of money from one mutual fund scheme to another at predetermined intervals. Whether you’re using STP’s to stagger money into the equity markets, or to systematically book profits out of them, liquid funds make for an ideal fund in both cases. The steady nature of their returns, coupled with their low inbuilt charges and non-existent exit loads, make liquid funds extremely efficient for this purpose.

Temporary Parking of Booked Profits

Planning to book profits from your equity funds? Look no further than liquid funds – as a temporary parking space, Liquid Mutual Funds work really well. Instead of redeeming moneys into your savings account (where you’ll earn barely 4 per cent and be tempted to spend your money as well), switch the booked profits into a liquid fund instead. Once you choose to redeploy the moneys into longer term investments, you can simply switch the funds back in a costless and convenience manner!