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Are Liquid Funds A Good Choice For Emergency Corpus?

Both liquid and long-duration instruments like annuity, public provident fund (PPF), National Pension System (NPS), etc., are necessary to make the portfolio effective for all situations

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Outlook Money
December 6, 2023
Liquid Funds

Liquid Funds

Liquid assets or a ‘liquid corpus’ is a good choice for emergency corpus as it reflects in the portfolio to meet your financial emergencies regardless of age. Short-term bank fixed deposits (FDs), ultra-short-term debt funds, digital gold, etc., are commonly used for steady cash flows and liquidity. While long-term assets are crucial for wealth creation, short-term liquid funds can help meet immediate needs.

Your investment portfolio will be incomplete if you do not maintain sufficient liquidity in addition to long-term growth assets to meet your varied monetary requirements from health emergencies, children’s education, and marriage to retirement.

Liquid mutual funds can be quickly converted into cash to meet your immediate needs. These instruments are also called debt funds as they invest in fixed-income instruments like Treasury bills (T-bills), commercial papers, etc., which have a maturity of 15 to 364 days. These funds also carry the lowest interest-rate risk in the debt category.

Why Invest In Liquid Funds

Says Abhijit Talukdar, a Securities and Exchange Board of India-registered investment adviser and founder of Attainix Consulting: “Emergency corpus that can support 3 to 6 months of expenses may be held in a liquid debt mutual fund. These funds invest in money-market instruments with a maturity of up to 91 days. They generally give slightly better returns than the savings bank interest rate. The only other liquid instruments are liquid exchange-traded funds (ETFs). However, they pay interest every month, unlike a daily basis in liquid MFs.”

So, while making a financial plan, consider your short- and long-term financial needs and properly evaluate the investing tools based on their specific purposes to get maximum benefit.

Liquid funds provide capital protection and liquidity as they invest in high-quality debt securities. Also, their average maturity is not more than 91 days, making them less prone to interest rate risks. Typically, liquid funds provide better returns than a regular savings account, as they seek to deliver returns by aligning the maturity of the securities and the portfolio.

Who Should Invest In Liquid Assests?

If you have a significant amount of cash lying idle in your savings bank account, consider investing in liquid funds for your emergency corpus. It will likely give you better returns than a regular savings bank account. Additionally, liquid funds generally do not have an entry or exit load, and the annual fee is also usually low, ranging from 0.30 to 0.70 percent. Moreover, if you are new to the stock market, liquid funds can be your first foray into the world of mutual funds before you expand to equities.

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