Instant Cash Only From Liquid Funds

  Author: Abhijit Banerjee

Investors in mutual funds typically invest in liquid funds or liquid mutual funds for meeting imminent needs. This includes major expenses that are bound to come up in the next 3-6 months besides emergency expenses. Easy access and tax-efficient returns that are higher than other fixed income investments such as interest bearing fixed deposits (FDs), make liquid funds a great hit with many investors. In the recent past, instant redemption feature in liquid funds has been introduced and advertised by many mutual funds.

Instant liquidity feature for ultra short term debt funds Interestingly, the same feature was sought to be introduced in other categories of debt funds, especially in case of ultra short term debt funds. While liquid funds invest in debt securities with maturity below 91 days, ultra short term funds invest in debt securities with a longer tenure than liquid funds. This allows mutual funds the possibility of offering higher returns than liquid funds although such funds also make investments that have higher risk than liquid funds. In this backdrop, instant redemption feature gave these investments an edge. But this turned out to be shortlived.

 On April 26, market regulator Securities and Exchange Board of India (Sebi) ruled that instant redemption feature can only be offered by liquid funds. While liquid funds and ultra short term funds provided returns of 7.86% and 8.36% in the last one year, one has to remember you need to keep liquid investments only to the extent you need. Many investors make the mistake of making large amount of liquid investments. As a result, their overall returns suffer. Of course, it helps if you get reasonably good tax-efficient returns. For higher returns to meet other needs, we would advise you to consider other mutual funds and other investments.