Liquid funds have become popular in the volatile world of mutual fund investments where investors need both security and return. These funds attracted the most net inflows of Rs 59,471 billion or approximately 60% of total debt market inflows in the month under review. However, before embarking on the path of liquid fund investments, there is a need for rigorous due diligence of essential issues to guide an investor in arriving at well-informed choices regarding his/her investment.
Crucial points to be kept in mind before investing in liquid funds:
- Liquid funds aren’t risk free: However, it is also important to note that liquid funds do not represent an entirely risk-free investment proposition. Although these mutual funds do pose relatively lower threats as compared to others, they too are not exempt from market effects. In fact, liquid funds generally place their money on short-term money markets’ short-term debts with limited maturity period of ninety-one days hence making them stable investments. On the other hand, the investors should note that though these assets are almost risk-free, they still may have impacts of changing interest rates or credit risks.
- Liquid fund returns supersede savings account returns by a significant margin: Liquid funds are one of the attractions for investors as high returns are possible and that too compared to the meagre interest which is typically offered in banks. Such liquid funds invest in tools that pay a slightly higher rate of interests compared to a simple bank account, enabling individuals to obtain better yields for their idle money. They provide for stability yet enough room for growth and the returns are not as great as with equity funds.
- Investors should analyse the expense ratio of a liquid fund before investing: The expense ratio is one critical consideration for the total return from a mutual fund. The costs incurred on a liquid fund significantly influence the performance of investors, meaning that investors should not overlook the same. In comparison, the lower the expense ratio, the more of the fund’s assets are working toward returning value to investors. Therefore, one should opt for liquid funds where the expense ratio is not too high.
- Fixing an investment horizon facilitates higher returns: Specifically fixing an investment horizon increases returns than liquid funds that target only short-term investment objectives. A common and costly error that investors make is viewing liquid assets as funds stagnating in a parking lot with no direction. Maximizing the returns from liquid fund investments calls for short term investment horizon that is in tandem with other financial goals.
- Investors must consider the change in taxation rules post the passing of the Finance Bill 2023: Investors who have held on to their units in debt mutual funds for a period of less than three years shall henceforth pay SCTG taxes as per the general income tax slab rates. On the other hand, the investments in the debt mutual funds that an investor has kept for over three years shall attract the income tax rate as in a normal slab.
An SIP calculator plays a crucial role in helping an investor assess their investments:
Utilizing a systematic investment plan (SIP) calculator is instrumental in helping investors assess the potential returns and make informed decisions. An SIP calculator considers factors such as the investment amount, tenure, and expected rate of return to provide a clear projection of the future value of investments. This tool empowers investors to align their investment strategies with their financial goals and adjust as needed to achieve the desired outcomes.
Leveraging tools like the SIP calculator can further enhance an investor’s ability to make well-informed investment decisions. As the financial landscape evolves, investors must stay informed and make decisions after a detailed analysis.