Liquid fund invest primarily in money market instruments like treasury bills, certificate of deposits, commercial papers and term deposits, with the objective of providing income to investors and high liquidity. Liquid funds usually invest in money market securities that have a residual maturity of less than or equal to 91 days. A variant of liquid funds, known as ultra-short term debt funds, invest in money market securities that mature in 6 to 12 months. In this article, we will discuss 5 reasons to buy liquid mutual funds.

• Enhanced income compared to savings bank accounts: Liquid funds can help investors make their idle money work instead of keeping them in savings bank accounts. Savings bank accounts usually pay around 4% interest rate, while liquid funds give money market yields, which are significantly (at least a few percentage points) higher than savings bank account. Liquid funds are ideal for parking funds for a period of few days, few weeks or few months. For investment periods of 6 to 12 months, however, ultra-short term debt fund is better investment choice because it can give higher yield than liquid fund. If investors have large sums of idle money available, even a small percentage difference in yields can have a fairly significant financial impact.
• Flexibility to draw your money at any time: As the name suggests, these funds are highly liquid. Redemptions from liquid funds are processed and money is credited to your bank accounts within 24 hours on business days. Redemptions from other mutual fund schemes may take a few days to get processed. Some liquid fund schemes offer instant redemption facilities for online transactions or mobile applications; redemption proceeds are credited to bank accounts within a few minutes.
• No exit load (transaction costs for early withdrawals): Unlike Fixed Deposits which charge a penalty (of around 1%) for premature withdrawals or mutual fund schemes with exit loads, there is no penalty for redemptions or withdrawals from liquid funds at any point of time. As such liquid funds are ideal investment options for your emergency requirements.
• High degree of safety: The risk of capital loss in liquid funds is extremely low. Liquid funds invest in money market securities, which have much lower risks compared to bonds and non convertible debentures (NCDs). Due the extremely short durations (maturities) of money market securities, the interest rate risk is very low (virtually zero). In the last 10 years, liquid funds gave negative weekly returns only for a few weeks in 2013, when the US Federal Reserve started tapering the Quantitative Easing (QE) program for the first time since the financial crisis of 2008. Otherwise, liquid fund returns have always been positive. Issuers of money market securities usually have the highest credit ratings; therefore, credit risk is also low.
• Great short term investments in uncertain times: There are times when we are unable to make financial decisions due to uncertainty in personal or macro-economic circumstances. Enhanced returns, low volatility, high liquidity and flexibility make liquid funds the ideal investment options in such situations. While you are waiting to make a decision, your money is busy at work in liquid funds earning you returns while ensuring liquidity at the same time.