Nov 02, 2017 | Source: Dalal Street Investment Journal
If you have large amount of surplus cash in your hand and wish to park it for short duration and still earn decent returns, then liquid fund is your best option. If you keep the extra cash in savings bank account, you would be losing out on the returns you earn on the money. On the other hand, if you invest the amount in a bank fixed deposit, you compromise on liquidity as you would be locking up the amount for a fixed period of time and would not be able to withdraw it when you need it without compromising on your returns. Hence, the alternatives of depositing the surplus cash in savings bank account or investing it in a fixed deposit are not advisable. Liquid fund is the best investment to park your surplus cash for a short duration and still earn good returns.
So what are liquid funds? These are basically debt based mutual funds which invest money in short term market instruments such as government securities, treasury bills and call money. These instruments have comparatively lesser risk and liquid funds can invest in these instruments with a maximum maturity period of 91 days. The fund houses usually invest in instruments with high credit ratings (P1+). The liquid funds are least volatile among mutual funds as their NAVs fluctuate only to the extent of accrued interest income. Liquid funds do not levy exit load, which also results in higher returns.
Another advantage of liquid fund is that one can opt for a systematic transfer plan (STP) whereby the entire investment in the liquid fund or a specified amount from the liquid fund can be transferred to an equity fund of investor’s choice. This would help further enhance the returns on the amount invested.