When it comes to managing your surplus cash, most individuals rely on traditional savings accounts. However, there’s a more efficient way to earn extra bucks without sacrificing safety or liquidity — liquid mutual funds.
Liquid mutual funds are debt funds that invest in high-quality, short-term money market instruments like treasury bills, repurchase agreements, certificates of deposit (COD), or commercial paper. These are among the safest funds across mutual fund categories, owing to their extremely low lending duration.
These funds typically mature within 91 days, which helps reduce interest rate risk and keeps volatility to a minimum.
Unlike fixed deposits or recurring deposits, liquid funds don’t come with a lock-in period. Most redemptions are processed within 24 hours, making them an attractive option for those who want quick access to their money.
Here are the following advantages:
a) High Liquidity: Funds can be withdrawn at very short notice — some platforms even offer instant redemption.
b) Low Risk: Investments are made in high-credit-rated, short-term instruments.
c) No Entry/Exit Formalities: Many funds allow free withdrawal after seven days.
d) Tax Benefits Over Time: Gains are taxed as per income slab if held under 3 years, but long-term investors can benefit from indexation.
Despite their reputation as one of the safest mutual fund categories, they are not entirely risk-free. Also, these funds aren’t meant for long-term wealth creation. They work best as a short-term parking space, not as a substitute for equity investments or fixed deposits meant for long-term goals.