You may call it by any name Liquid Funds Contingency Fund or Money Market Fund, this category has shown a deep acceptance among retail (small) investors. Although the bank deposit or the money lying in savings bank account is much higher than mutual funds combined all schemes. But if we see from 2012 the trend has changed. This post will make you familiarize with Liquid funds and its role in making a contingency fund.
What are liquid funds?
Before answering this let me show you some recent facts on liquid fund category.
In just last 3 years the funds under management have grown by 321.5%. Greater than even Apple iPhones!!!
Some more facts:
Liquid funds are a type of mutual funds that invest in securities with a residual maturity of up to 91 days. Assets invested are not tied up for a long time as liquid funds do not have a lock-in period.
This means they invest where paper (average of all securities under investment) will not be more than 91 Days.
These mutual funds have no lock-in period. No entry load or no exit load is charged.
Withdrawals from liquid funds are processed within 24 hours on business days. The cut-off time for withdrawal is generally 2 p.m. on business days. It means if you place a redemption (withdrawal) request by 2 p.m. on a business day, then the funds will be credited to your bank account on the next business day by 10 a.m.
Performance? Better than your savings bank account
The below diagram tells you how liquid mutual funds invest in bank products and generate better returns than a savings account.
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Why will you invest in the liquid mutual fund?
Mutual funds help in:
- Getting better returns on short term horizons.
- Planning an emergency fund and getting returns on it.
Planning your Contingency or Emergency fund
Do you know countries too have contingency funds? Even World Bank has it. For an investor, it is very important to have a corpus which can be used in emergencies. These can be pleasant events like a vacation, a sudden marriage in the family or a purchase. This can be painful mishaps like an accident or a demise.
If you take this without involving emotions, this means you need to have money immediately and in may be in large sums. So in case, you do not have it:
- You borrow from workplace or friends. But this spoils your image and you can borrow small sums only.
- You borrow on credit card or loans from banks, pay interest and service a loan.
- You liquidate long term savings like retirement or kids education fund. But, you know the consequences.
So criteria to choose investments for your emergency/contingency fund is:
Here LIQUID FUNDS play a major role.
How much contingency fund?
This does not mean that you have to put all your contingency fund in liquid funds. But a major part can be parked here. Rest can be in your bank (so that you can withdraw using an ATM) and short-term funds.
You know some mutual funds provide same day redemption too?
Yes, few MFs like DSP Blackrock & Reliance provide the instant redemption facility. This means you can withdraw your money (subject to Rs 50000 or 50% of your balance, whichever is higher) anytime. This can be done on a holiday too. The money comes to your accounts normally in 15 min to 1 hr by IMPS (Immediate Payment Service) facility offered by banks.
Do share your views and interpretations in the comments section.
Also, share the article to help investors who need to benefit from Liquid Funds.