Liquid funds 101
Few weeks ago, I had posted a thread on 'Emergency fund' in which I told you all to invest 50% of that amount in 'Liquid funds'.
But, why? What's Liquid fund?
Here's everything you need to know 👇
Few weeks ago, I had posted a thread on 'Emergency fund' in which I told you all to invest 50% of that amount in 'Liquid funds'.
But, why? What's Liquid fund?
Here's everything you need to know 👇
First thing, make sure you follow the basics!
Check out my thread - Mutual Funds 101 - to get the primer about the topic 👇
Check out my thread - Mutual Funds 101 - to get the primer about the topic 👇
https://twitter.com/MoneyWell_/status/1398592516371279874?s=19
1/ Now, Some definition -
Liquid funds are a part of Mutual Funds. Liquid funds are debt funds that invest in fixed-income securities such as certificates of deposit, treasury bills, commercial papers, bonds and other debt securities that mature within 91 days.
Liquid funds are a part of Mutual Funds. Liquid funds are debt funds that invest in fixed-income securities such as certificates of deposit, treasury bills, commercial papers, bonds and other debt securities that mature within 91 days.
2/ I assume, you have read the 'Mutual Funds 101' and know everything about it !
The AMC or the Asset Management Company launches a 'Liquid fund' scheme wherein they collect money from public and then invest in companies that issue debt instruments for short term capital.
The AMC or the Asset Management Company launches a 'Liquid fund' scheme wherein they collect money from public and then invest in companies that issue debt instruments for short term capital.
3/ Liquid funds can only invest in short term debt instruments which matures within 91 days.
So, a liquid fund invests only in companies that require a loan for short period of time, say - 1,2 or 3 months.
The companies issue bonds or debentures when they require capital.
So, a liquid fund invests only in companies that require a loan for short period of time, say - 1,2 or 3 months.
The companies issue bonds or debentures when they require capital.
4/ You invest in a liquid fund (Investor)
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The AMC then invests that money in Companies that require short term capital. The company gives fixed interest on the money loaned to them.
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After maturity, the company pays back.
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The AMC then invests that money in Companies that require short term capital. The company gives fixed interest on the money loaned to them.
⬇️
After maturity, the company pays back.
5/ But, that doesn't mean you can invest the money in liquid funds only for a period of 91 days.
Instead,
You can keep the money invested in a liquid fund. The AMC will keep on Investing your money in various debt instruments for as long as you want and gain interest on it.
Instead,
You can keep the money invested in a liquid fund. The AMC will keep on Investing your money in various debt instruments for as long as you want and gain interest on it.
6/ There isn't any maturity period for the investor. And, you can redeem your investment from the liquid fund whenever you want.
If you redeem the money within a week , you'll have to pay exit load to the AMC.
If you redeem after a week then you don't have to pay anything.
If you redeem the money within a week , you'll have to pay exit load to the AMC.
If you redeem after a week then you don't have to pay anything.
7/ Advantage -
✅ Flexibility - You can invest whenever and whatever you want. And, can withdraw anytime.
You can withdraw money on the 8th day, 80th day...... whenever.
So, invest 50% of your emergency fund in a liquid fund. Earn interest on it. Withdraw in case of emergency.
✅ Flexibility - You can invest whenever and whatever you want. And, can withdraw anytime.
You can withdraw money on the 8th day, 80th day...... whenever.
So, invest 50% of your emergency fund in a liquid fund. Earn interest on it. Withdraw in case of emergency.
8/ How to select a Liquid fund?
1️⃣ Never invest in a liquid fund based on high returns. Why?
Because, companies that have low credit ratings or are in verge of bankruptcy, give higher interest because banks and other financial institutions doesn't give them loan as it's risky.
1️⃣ Never invest in a liquid fund based on high returns. Why?
Because, companies that have low credit ratings or are in verge of bankruptcy, give higher interest because banks and other financial institutions doesn't give them loan as it's risky.
9/ So, bad Companies can give higher interest but are too risky. Liquid funds can earn higher interest if they invest in them with high risk.
The sole purpose of a liquid fund is to keep your money safe and gain some interest with flexibility in withdrawal.
The sole purpose of a liquid fund is to keep your money safe and gain some interest with flexibility in withdrawal.
10/ 2️⃣ Invest in liquid funds that invest your money mainly in government securities or 'AAA' rated Companies as these have very less chances of defaulting.
You'll get all these details in any mutual funds website.
You'll get all these details in any mutual funds website.
So that was Liquid funds 101! I hope you found it useful.
For more educational threads on money, finance, and economics, do follow the page @MoneyWell_
For more educational threads on money, finance, and economics, do follow the page @MoneyWell_
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