Are liquid funds safe to invest in?

3 min read

Every individual has a different financial goal. Some have short-term/medium-term goals like buying a car or saving money for their marriage, while others have long-term goals like building a retirement corpus or saving enough for the child’s overseas education. When you understand the basics of financial planning and set defined goals, investing becomes a lot simpler. There are plenty of investment options to choose from and depending on your risk appetite, you should consider investing in a scheme that can help you get closer to your financial goal. There are two types of investors usually. Firstly, those who are completely risk averse and do not want to expose their finances to the volatile market conditions and, then there are others who do not mind taking the extra risk with the hope of fetching higher rewards. If you are someone who is risk averse then you should settle with investment options like public provident funds or bank fixed deposit. But if you are someone who wants to give their investment portfolio a slightly aggressive approach then you can consider investing in mutual funds.

What are mutual funds?

For those who do not know, mutual funds are professionally managed funds that invest in stocks and other money market instruments like debt, government securities, corporate bonds, call money, treasury bills, etc. Asset management companies and fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. Mutual funds are considered to carry a diversified portfolio and the performance of these funds solely depends on the performance of its underlying assets.

What are liquid funds?

Mutual funds are further categorised based on certain unique attributes like asset allocation, risk profile, investment objectives, investment strategy etc. While most investors are comfortable investing in equity mutual funds because of the high risk rewards ratio that they offer, there are other mutual funds like liquid funds which can be considered by investors to give their investment portfolio some diversification. While equity mutual funds invest predominantly in equality and equal related instruments, liquid funds and those mutual funds that invest in fixed income securities like G-sec, commercial papers, corporate bonds, etc. 

Is it completely safe to invest in liquid funds?

When you invest in mutual funds, be it equity, debt, hybrid, solution oriented or ETFs, there is always some amount of risk involved. This is because when you invest in mutual funds, you are exposing a certain portion of your investment to the vagaries of the volatile market. Also, no investment is considered to be completely risk-free and there is always some risk associated with mutual fund investments. Having said that, investments made in liquid funds can be considered a lot less risky than those made in equity mutual funds solely because liquid funds are those debt funds that invest in fixed income securities which come with a maturity period. Also, in case of emergencies one can use these funds to liquidate money. This would not have been possible if you solely invested in equity funds like ELSS that come with a predetermined lock-in period of three years.

Hence, we can say that investing in liquid funds is not completely safe but feasible as compared to investment made in equity funds. However, investors should bear in mind that liquid funds are mutual funds and investments made in mutual funds are subject to market risk and returns from such investments are never guaranteed. So if you are someone who is completely new to mutual funds or investing in general, then it is better that you see the help of a professional mutual fund expert.

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