Are liquid funds 100% safe?
Hence, the NAV of the fund remains almost steady. This makes liquid funds low-risk investments. However, it is important to note that if the credit rating of any underlying security drops, then the NAV can experience a drop too. Liquid funds are NOT risk-free.
In comparison to many other types of investments, liquid funds are one of the safest investment options as these funds invest in very short maturity papers and securities with high credit ratings. This reduces the overall risk of investing in the scheme.
In liquid funds, you can put your money today and take it out a day after, and you will get one day's return on your investment. So, there is no restriction, and they are very safe.
As per the data from Value Research, many large liquid funds have actually delivered negative returns. Ultra Short Duration Funds have given -0.48%, market funds have given -0.51% and low duration funds have delivered -0.91%.
| Scheme Name | Plan | 1Y |
|---|---|---|
| LIC MF Liquid Fund - Direct Plan - Growth | Direct Plan | 7.27% |
| Bandhan Liquid Fund - Direct Plan - Growth | Direct Plan | 7.31% |
| HSBC Liquid Fund - Direct Plan - Growth | Direct Plan | 7.30% |
| HDFC Liquid Fund - Direct Plan - Growth | Direct Plan | 7.24% |
Yes, liquid mutual funds are a better investment option than short-term FDs as they have no lock-in period. Furthermore, there is no penalty if you withdraw your money after 7 days.
Disadvantages of liquid funds
Additionally, although liquid funds are deemed low-risk, they are not entirely devoid of risk. While rare, there is a possibility of credit risk associated with the underlying securities held by the fund. Another downside is the impact of taxes on returns.
Low Risk
While debt funds can be riskier when held for a long duration, the maturity period of 91 days of liquid funds makes them one of the safest options for investors. Liquid funds, because of their short-term underlying securities, have minimum risks.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Bank savings accounts
Your savings account or your checking account is a no brainer. It is as liquid as liquid can be and you can access these funds at very short notice. Of course, the rate of interest earned on these funds is just about 4% while a handful of banks give higher rates of interest of up to 5-6%.
How long should I invest in liquid funds?
Surplus cash invested in money market mutual funds earns higher post-tax returns with a reasonable degree of safety of the principal invested and liquidity. Liquid funds are preferred by investors to park their money for short periods of time typically 1 day to 3 months.
The cut-off timing for overnight mutual funds and liquid funds is 1:30 PM, and for mutual fund redemption and other schemes applications, it is 3:00 PM. You must apply for a Mutual Fund purchase before this cut-off time to get the same-day NAV.
These securities are at the bottom of the risk spectrum and therefore offer lower returns. Since liquid funds now must invest at least 20% of their assets in these low-return securities, part of the drop in returns can be attributed to the same.
How much do you need? Everybody has a different opinion. Most financial experts suggest you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000.
Liquid funds
They are suitable for individuals and organisations looking to invest in short-term, ranging from a few days to months. The benefit of liquid funds over savings accounts is that it allows the generation of reasonable returns and at the same time investors can access their funds quickly.
This insurance protects your money if the financial institution you bank with goes out of business or otherwise can't afford to let you withdraw your money. So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account.
Liquid funds are ideal for low-risk investors looking to park surplus cash for the short term. The biggest advantage of liquid funds is that it offers superior returns than bank deposits. But the returns on liquid funds is not guaranteed. This is the biggest disadvantage of liquid funds.
Investing in liquid securities is typically less risky than investing in illiquid ones. Therefore, illiquid assets tend to require a higher risk premium as compensation.
Taxation on Liquid Funds
The taxation of liquid funds is based on the duration for which they are held: Short-term Capital Gains (STCG): If the units of a liquid fund are sold or redeemed within 3 years, any gains are classified as short-term capital gains and are taxed according to the investor's income tax slab rate.
Liquid assets refer to any assets that can be readily converted to cash without losing any or much of the market value.
Are liquid assets safe?
In the context of investments, the most liquid personal assets are items that trade easily and where there are always willing buyers on the open market, such as individual stocks or mutual funds. Because these items can be unloaded throughout the trading day, they act as a financial safety net for investors.
In order of liquidity, the most liquid investments include: Money – actual cash currencies. Money market assets – short-term debt securities such as CDs or T-bills. Marketable securities – stocks or bonds.
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
During challenging financial times, cash and liquidity is king. Having easy access to cash during a recession can help you avoid going into serious debt.
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
