Debt mutual funds are considered a better alternative to Fixed Deposits (FDs). They give higher returns and have higher liquidity than FDs. Holding debt funds for more than three years also comes with tax benefits. Liquid fund in India is a popular variant of debt funds that many investors include in their portfolio. They invest in debt securities that mature in 91 days. One reason why you want to invest in liquid funds in India is to park your money only for a short-term and get some additional benefits. Given their highly liquid nature, these funds do not come with a lock-in period. Whenever you choose to withdraw your investment from the funds, you get the money within 24 hours.
However, the real challenge arises while selecting from several liquid funds in India. Before making the selection, you need to understand the basis on which you compare these funds. Let’s look at the important things you should keep in mind to ensure you invest in the right liquid funds.
- Look at The Reputation of Chosen Fund House
The return you get by investing in liquid funds in India depends on the selected fund house. Some invest only in government securities without facing any credit risk. while others take higher credit risk and offer good returns to the investors. Irrespective of the credit risk involved, it is crucial for you to check the market reputation of the fund house you choose. Start with evaluating different fund houses based on their track record or performance in the last few years. Fund houses that have a consistent record over the previous five years are a good choice.
- Check the Consistency of Fund Returns
Think of the returns that you can expect from the selected liquid funds in India. One reason why you want to invest in these funds is to get an additional return on your money over small tenure. So, skipping the return factor while choosing the funds is not a good idea.
As a rule of thumb, opt for those liquid funds in India that have delivered good returns in varying market conditions in comparison to their peers.
- Consider the Funds’ Expense Ratio
There are two ways in which liquid funds in India earn money – one is the interest income, while the other is capital gains. You can expect good returns from your investment only if the chosen fund houses are willing to take high credit risk.
But what if you have chosen two funds, both of which are taking similar credit risk and interest rate risk?
In both cases, the returns will be similar as well. If one of these funds have a higher expense ratio, it means the fund expenses will most likely be taking up a part of your returns. That’s why you are recommended to choose funds that have a lower expense ratio.
- Select Funds with Large Corpus
Liquid funds in India do not carry significant interest rate risk but have credit risk associated with them. Funds that have a large corpus have a broader scope of investing in a wide range of securities, thereby facing less concentrated exposure. Even if one of the securities in their portfolio defaults, they face lesser impact in comparison to the funds that have higher exposure. So, check the total AUM at the time of selecting liquid funds for investment.
Investing money in liquid funds in India is a good alternative to keeping cash. However, knowing how to choose the right funds is essential, especially if you are new to investing. Seek advice from a professional financial advisor, like FinEdge, to find the best funds for investment. Also, build a habit of reviewing your investment portfolio regularly.