Doing more with Liquid Funds while channelling investments

As a category, liquid mutual funds are generally used as temporary investment vehicles where corporates and individuals could park their surpluses. However, investors could use liquid funds strategically for multiple purposes and benefit significantly from them. Investors can utilise a liquid fund for maintaining their emergency corpus, consider it as an intermediate vehicle before moving a lump-sum into equity schemes, devise a systematic transfer plan (STP) and as an avenue for parking the profits booked from the sale of any other investments.

What are Liquid Funds?

Now, liquid funds typically invest in debt securities that mature on an average within 91 days. These include treasury bills, commercial papers, certificates of deposits, tri-party repos (TREPs) and collateralised lending & borrowing obligations (CBLO). 

Here, investments are made in fixed instruments that carry the highest ratings from issuers, generally a mix of sovereign and high-quality private institutions. Therefore, liquid funds hardly carry any credit risk and because these funds invest in very short-term instruments, they are also relatively immune to duration risks as they are less sensitive to interest rate movements and more aligned to the liquidity in the financial system resulting in minimal volatility. Besides, they also offer a better return than traditional money parking avenues in less than 91 days’ duration.

How to get more out of them?

A few key aspects to note about liquid funds before going to specific usefulness of these schemes pertains to their liquidity and safety. Typically, liquid funds can be redeemed within 1 business day (T+1) basis. Many mutual funds also allow instant redemption to the tune of Rs 50,000 via the online mode. So, essentially, there is a facility to avail these funds on tap at any time an investor requires them or within minutes. 

Also, given that they invest in a mix of sovereign or highest rated instruments with very short maturities, the probability of a default is negligible or any other servicing problems from security issuers. Besides, liquid funds tend to deliver better yield than traditional saving modes in the stipulated duration.

Usage to match financial objectives

Ideal for gradual deployment to equity funds: Many investors may be nervous about investing in markets at elevated levels or at record highs. A few may not be comfortable with investing an entire amount at once into equity funds due to the fear of a market downfall. In such cases, parking the total amount in a liquid fund could be a good idea, as it would be earning returns till the time it gets fully deployed into equity funds.

Suitable for STPs: If investors are unable to decide or hesitant about making the move to equity funds as mentioned earlier, then they can also opt for the STPs offered by fund houses. In a STP investors can park the money in a liquid fund and direct the amount and frequency at which they wish to move the predetermined sums to equity funds. This process is fairly simple and can even be done online.

Vehicle for emergency corpus: As a part of overall prudent financial planning, investors are often advised to maintain an emergency corpus worth 6-9 months of expenses and loan instalments to take care of any contingencies. Liquid funds would be ideal for holding one’s emergency corpus, especially given the safety and liquidity they offer. That way the invested amount would be earning reasonable returns over time and for immediate requirements, investors can use the instant redemption facility made available by several fund houses. 

Instruments for parking sale proceeds: Often investors book profits from equity investments. They may also sell physical assets such as real estate or gold. In such cases, it may be a good idea to park the amount in liquid funds till a decision on what to do with the sale proceeds is made. That way the amount made from sale of investments would not remain idle.

(The writer is Principal- Investment Strategy, ICICI Prudential AMC)