Decoding investments in ‘new’ liquid mutual funds

Liquid funds are a category of debt mutual funds which invest in very short-term market instruments like treasury bills, government securities and call money. According to Sebi's definition, liquid funds can invest in debt and money market securities with maturity of upto 91 days only. 

After SEBI’s latest guidelines for liquid funds, these schemes are supposed to become safer than before. Liquid funds can now invest maximum 20 per cent of their assets in one sector. These schemes are considered a good option for retail investors who are looking for minimum risk and higher than savings bank account returns. 

After the change in norms, the valuation of all investments will now be entirely on mark-to-market basis. This means all securities in the portfolio will be valued at prevailing market price. Financial planners believe that there might be a dip in returns because of reduction in risk taken by these schemes. 

Liquid funds, as the name suggests have easy liquidity. Investors can get their money back one day after submitting a redemption request. Mutual fund advisors recommend liquid funds for very short term money parking or short term goals. Investors who want to park their money for one day to six months can look at liquid funds. Liquid funds are also used extensively for staggering a lumpsum amount in equity through systematic transfer plan. This helps investors tide over volatility in the equity markets.