Advantages and Disadvantages of Liquid Funds

Disadvantages of Liquid Funds

One can ponder upon factors which are dependent for investing in the highly volatile industry of mutual funds. That is to say, which is extremely volatile itself in investing in the Liquid Mutual Funds or Liquid Funds industry too. So, Why you chose liquid mutual funds other than equity funds or other debt funds is an important factor too. It is really crucial that you know about the pros & cons of the market before investing your valuable assets in the mutual industry.

Here, we have given some fundamental and conclusive advantages and disadvantages before you think of investing in liquid mutual fund:-

Liquid Funds Advantages

  • Safety & High Liquidity:-

It’s a short-term, open-ended debt fund which probably ensures less risk for the inquirer and default payment chances. Its main objective is to provide superior returns with less expenses also with minimal risk other than equity funds which have higher risk. This is because main monetary areas for investment are into T-bills, CDs, CPs, repos, zero coupon bonds etc. which has a steady return less than average 8%-10% which is greater than any bank deposits.

  • Quick & Flexible Redemption:-

Having redemption period up to 91 days only, it is also flexible in partial redemption which is not possible in traditional FDs. Further, a liquid fund has the convenience of calculation of NAV(Net Asset Value) on 365 days a year which is unlikely for an equity fund obviously where NAV can’t be calculated with weekends. Additionally, one can withdraw the liquid money within their exit period of 1 week.

  • Perfect for Emergency Funds & STP:-

It has the easiest STP into equity funds to transfer a fixed money with beneficial cost-averaging. This way, you can avoid investing lump sum amounts on equity funds & earn highest liquid fund returns.

Another benefit of liquid funds is it can be redeemed with penalty in emergency periods, & 7 days lock-in period which is extraordinary in respect of PO savings schemes which have long lock-in periods.

Liquid Funds Disadvantages

  • Low interest rate:-

One of the backlash of investing in liquid mutual funds is that it provides low rates of returns with low risk instead of higher rates of returns on higher risks like that in equity funds though it is more stable with an easy exit period. So, one can’t go beyond limits in case of liquid funds.

  • Absence of Guarantee:-

As it experiences high fluctuations, there is no guarantee to be safe in principal liquid funds. But, as a matter of fact, it is still safe for the very reason of investing in AAA rated papers.

  • Costing Fees:-

Though the expense ratio of liquid funds is very low on the contrary with equity funds where average expense ratio is  2%-2.5% , it has drawbacks of management fees which is indeed necessary as a fund manager is appointed to manage the portfolio and funds of yours.

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