Understanding risk factors of liquid funds

We are always keen to get higher returns on our investments. However, many times, we end up parking our money in the savings accounts. Have you given a thought to why not think of investing your money where it will fetch higher returns! You can select the liquid funds as an investment option and make the most of these funds.

What is a liquid fund?

Liquid funds are a debt fund mutual scheme. If seen from the volatile point of view, it is considered as a safe option. Many of us wish to earn a lot of money with fast and easy returns. Thus, instead of investing your money in savings accounts, use this option. This scheme is known as an investment tool to earn interest or returns. Liquid mutual funds have left saving banks and fixed deposits behind. It has become a popular alternative and is also considered an easy and safe investment option.

Tax benefits, interest rates and liquid funds are anytime more helpful for the investors if compared to the old and traditional investment options such as fixed deposits and savings accounts. In addition to that, liquidity plays a vital role as in case of a sudden rise in any unexpected outflows or expenses; the liquidity margin can always come in handy.

However, we should not forget the risk factors of liquid funds. Have a look at these risk factors-

  • Interest rate risk-

The interest rates behave inversely to investment in Liquid Funds. It is good if the interest rate goes down as it will boost bond prices. If you take a wrong call regarding interest rate then you might lose some money.

  • Credit risk-

Credit risk is defined as the risk of losing interest in the investment and capital. The instruments having lowest credit rating will give better yields. It will cause the highest credit default risk. These funds are not insured in any way. On your redemptions of the units, there is no assurance of getting your invested capital.

  • Inflation risk-

Inflation risk is higher when the maturity period of the bond is for a longer period. However, in liquid funds the risk of inflation is low as the investment is for the shorter period.

Even though there are risks in liquid funds you can certainly overcome them with proper planning and taking help from a good investment advisor. Remember to analyze your portfolio so that you go for a high credit rating.</div?

Understanding risk factors of liquid funds
Tagged on:

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.