Are "Liquid" Funds a good return or a gimmick?

Question

I reside in India and I am looking for an investment option and my friend suggested investing in Liquid funds .

Do these have a good return or are these just a gimmick?

Answer 1

Good is relative.

Liquid funds are essentially "Debt" funds. i.e. these invest into various Bonds, either issued by Government or leading companies, etc. Hence these are definitely very safe to preserve capital. Returns depends and typically is similar to the returns of FD from leading Banks. There are certain plans that offer slightly better returns than FD's, it also depends on the duration and when you invested in a particular fund.

Answer 2

Here is a summary from Value Research

What are liquid funds? These are funds which do not invest any part of assets in securities with a residual maturity of more than 91 days are liquid funds. The average portfolio maturity of this category ranges between four and 91 days.

These funds invest in short-term debt instruments with maturities of less than one year. Investments are mostly in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between 3 and 6 months.

Why invest in liquid funds? These funds provide good liquidity, low interest rate risk and the prevailing yield in the market. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.

While liquidity is one factor of these funds, safe investments make them the preferred parking option for HNIs and corporates. Moreover, the maturity makes them relatively less sensitive to interest rate fluctuations, compared to other debt funds.

For all these reasons, liquid funds are used as an alternative to short-term fix deposits. Most schemes have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours.