Liquid Fund Schemes

Prof. S. Thilak, Assistant Professor, SIMS

Liquid funds are debt funds that are invested in short-term fixed-interest generating money market instruments. These can be treasury bills, commercial paper, and so on, which mature within 91 days. Liquid funds aim at providing a high degree of liquidity and safety of the capital to investors. The allocated proportions are as per the fund’s investment objective. This reduces the sensitivity of fund returns to interest rate changes. Liquid funds are an excellent option to park your idle money. These are low-risk havens which offer higher returns than a savings bank account. Liquid funds try to emulate the liquidity aspect of a savings bank account.

Recently due to this pandemic The Reserve Bank of India have limited their rates. Currently the repo rates in the economy for the main borrowers and commercial rates have reduced by 4%. This will lead to reduction of deposits and lending rates in banks, as a result the money yield in money market securities and short-term debt instruments is also dropped. State Bank of India is now offering 2.75% interest on its savings account and fixed deposit the interest rate is down to 4.4%. It is no different when it comes to liquid funds. One-year yields on these schemes have fallen to a range of 3.5-4 percent. Despite the low returns that can’t really swap short duration debt funds at the same time and they can’t rely on liquid funds to park short-term money. The advantage of using liquid funds over fixed deposits for very short-term parking of money is the flexibility of anytime withdrawal and one-day credit. Operationally and redeeming from liquid fund is as easy, as a click of a button allows instant redemption. The essential  need is to watch out for in times of low interest rates is allocating too much in one go.

Earlier this happenned to be careless about how much is lying in liquid fund and keep money there for a year even, now it is necessary to manage this allocation a bit more actively. Allocate amounts to be parked for 1-3 months or emergency fund sums in liquid schemes; for everything else, find an alternative. Re-evaluate what’s already parked in liquid funds and if you find that you don’t need as much money in short term funds, then move it to other schemes or investment options. Make sure that the money needed after more than six months is allocated to slightly longer duration short term funds rather than liquid funds, that will help you maximise return. Bonds with residual maturity of 3-6 months, with high credit quality are also an alternative.

DIRECT PLANS

Even within the category look for plans which can give extra bit. For large amounts to be kept in liquid funds, go for the direct plan, which can give you 10-15 bps higher return as compared to the regular option. Keep in mind that most liquid fund schemes will have an exit load for up to seven days of investment. In times when returns are low, an exit load – even if it is a small portion and only there for withdrawals of seven days or less – matters and can dent the returns.

For short-term parking of cash, don’t get adventurous

Do not take risks with your short-term funds. People may be tempted to look for higher return options or at least the possibility of it through other funds such as short-term income schemes or even high yield bond funds. However, this will not solve the purpose and short-term funds can be more volatile on daily returns as compared to liquid funds and credit risk funds are volatile.

Along with the lower interest rates in the economy, the recent brush with credit risk for the debt funds has meant even lower risk for certain categories, pulling down returns. Nevertheless, liquid funds provide a kind of flexibility along with competitive returns in the very short-term category, which is useful for working capital requirements in a personal or business portfolio. Be more nimble and active in managing this, but take care not to get too adventurous in looking for alternatives as you might end up taking on risk you don’t need.