COMPLETE GUIDE TO LIQUID FUNDS (2024)

FAQs

What are the new rules for liquid funds? ›

SEBI's new rule requires debt funds to use the more transparent mark-to-market valuation rather than the amortisation method to value debt securities. [Amortisation is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time.

Liquid assets are assets that are easily and simply converted to cash. Examples of liquid assets include cash, bonds, and CDs. Assets that lack liquidity require time or effort to trade or sell, like real estate or collectibles.

Liquid mutual funds are debt funds that invest in short-term assets like treasury bills, repurchase agreements, COD, or commercial paper. These funds are only permitted to invest in debt and money market tools with maturities of up to 91 days under SEBI rules.

Liquid funds are considered to least risky among all classes of debt funds as they mostly invest in high-quality fixed-income securities that mature soon. Therefore, these funds are suitable for risk-averse investors.

While liquid mutual funds offer many benefits as outlined above, they also have some limitations. The disadvantages of liquid funds are as follows: Exposure to certain risks: Liquid funds may carry some risks like inflation risk, interest rate risk and credit risk.

Is a house a liquid asset? Homes and other real estate are nonliquid assets. It takes months to complete the sale of a home or other property and realize the cash that might come with that.

Funds held in a CD cannot be accessed until the account term is reached. If you need to withdraw money from your CD prior to its maturity date, you will have to pay a penalty. A liquid CD, however, offers flexibility to withdraw money from your account prior to its term date without the usual fees.

A no-penalty certificate of deposit (also known as a liquid CD) is a type of CD that allows you to withdraw funds without paying a penalty. The account's funds are accessible at all times—unlike most traditional CDs. Traditional CDs typically charge a hefty penalty fee for withdrawing money early.

High liquidity with no lock in period- Liquid funds do not have a lock-in period. Investors can choose to redeem their investments whenever they want. Low risk- Owing to the short term nature of the underlying securities, liquid funds have one of the lowest interest rate risk as compared to other debt funds.

Which is better, debt fund or liquid fund? ›

Stability of returns: The difference between liquid funds and debt funds in terms of the stability of returns is that liquid funds are more stable in terms of returns because of their short-term duration and therefore less linked to interest rate movements in the market.

Both the options have their pros and cons. While liquid funds can provide better return potential, savings accounts offer easy access to liquidity. An investor must consider factors like returns, liquidity, risk, and safety before choosing either of the two.

Liquid funds can invest only in listed commercial papers, and they have an overall exposure limit of 20% in a sector. They are not permitted to invest in risky assets as defined by SEBI norms. These norms aim to contain credit risk in the liquid fund portfolio.

How to redeem liquid funds? You need to put in a redemption request with your Asset Management Company (AMC) to redeem your money invested in liquid funds. As per Securities and Exchange Board of India (SEBI) regulations, the liquid scheme offers insta-redemption facility, investors can instantly redeem up to Rs.

You can redeem anytime you want. There is no lock‐in period in liquid funds. Do liquid funds have an exit load? Yes, but only if you redeem within seven days of investing.

A Liquid fund invests your money into debt instruments like Treasury bills, commercial paper, zero coupon bonds, and securities instruments like a certificate of deposit. These investment instruments provide low returns compared to equity markets but can give immunity to highly volatile conditions like a recession.

Liquidity Management Rules: Current and Proposed

[1] Critically, the rule limits the portion of a fund's assets than it can hold in its illiquid bucket to 15%.

The rule was amended to remove the ability of a money market fund to impose liquidity fees if their weekly liquid assets fall below a certain threshold and implemented a framework for both mandatory and discretionary liquidity fees.