In India, one of the mutual fund classifications that are less well-known than others is the category of liquid funds. They are known as debt funds as well as they put the money in short-term money-market assets such as commercial papers, treasury bills, and other similar financial products. When compared to debt funds, the best liquid funds are distinguished by the fact that their investments are restricted to fixed-interest-producing instruments that will mature during the next 91 calendar days.
Liquid fund returns
This is typically the criterion that is the most universally applicable when assessing the effectiveness of any fund. Investors have always had a preference for a fund that has a track record of providing favorable returns. On the other hand, one ought to exercise a modicum of caution if, in recent times, the fund has demonstrated a substantial outperformance when measured against a category of funds.
That might be an indication of the aggressive investing style employed by the manager of the fund, in which case high yields may well have been obtained at the expense of a correspondingly high level of risk. That might not be attractive for defensive equity funds such as liquid mutual funds, which are typically utilized by investors for short-term investment opportunities.
Average Maturity and Modified Duration
It is recommended that the average maturity of such debt mutual fund schemes be kept relatively short, somewhere between 30 and 90 days, to reduce its susceptibility to shifts in interest rates. The modified duration of a bond can be used as a measurement tool for determining how sensitive it is to changes in interest rates. The modified duration is a measurement that determines how sensitive the price spectrum of such a bond is to changes in interest rates.
Since it takes into account all aspects of a bond, including its price, coupon, maturity date, as well as interest rate, it is an important metric for you to think about. Modified duration is calculated using this metric.
Expense ratio
You should keep in mind there is also an annual fee associated with your investment in the best liquid fund even though you are enjoying the returns on your investment. Because it is an index fund that is just not actively managed and the RBI governs the expense ratio, this ratio is not so high as to significantly reduce the number of gains you can expect to realize from investing in the fund. Nevertheless, you ought to take into account this aspect before settling on the best liquid fund scheme to put your money into.
The Primary Purpose of the Fund
There are several different plans to choose from, including growth plans, daily dividend plans, each week dividend plans, as well as monthly dividend plans. Plans seem to be selected according to the amount of risk you are willing to take as well as the amount of money you will need. You will be better able to cover unexpected costs and protect yourself from the risk associated with equity investments as a result of this.
Diversification
The diversification of an investor’s portfolio is among the most important things they should think about when making investments because it spreads out the risks. You need to make sure that perhaps the investment portfolio of the fund is sufficiently diversified and is, therefore, not overly weighted with withholdings from a single issuer group or industry. In addition, the degree of correlation between the various issuers and sectors represented in the portfolio must be low or negative. This will assist in reasonably diversifying the risks of the negative impact that may arise due to adverse market circumstances for a specific issuer or sector.
Therefore, for the short term or in an unexpected circumstance, the best liquid funds are an excellent investment option. You get steady returns at minimal risk.