Liquid funds are popular for many reasons. They are comparatively safer investment options, highly flexible, and offer decent returns in a short time of investment. If you are an investor who has just started with their investment journey with mutual funds, received windfall gains, or have enough cash in hand, liquid funds might prove to be a meaningful investment option for you. But, like other mutual funds, liquid funds come with a certain level of risk. Hence reasonable knowledge and planning for investment become integral. When it comes to gathering information, there is a world rounding us. Out of them, some are accurate, but some can turn out to be misleading too. Often there are certain misconceptions regarding investment avenues (in this case, liquid funds) that mislead investors and derail them from making an informed decision. So here are some of the myths we have quelled that you must have or are likely to find to help you gain clarity towards your investment journey with liquid funds. 

Myth 1: Liquid funds are entirely risk-free: 

Truth: This isn’t true. Liquid funds are mutual funds. So they are riskier to an extent. The risk factor of these funds lies in their interest rates and credit risk. Know that the bond price is inversely proportional to the current interest rates. Whenever the interest rates rise, the bond price falls and vice versa. So, if you find the fund’s maturity profile (which indicates the fund’s risk & performance with interest rate changes) to be high, it means the fund is exposed to high-interest rate risk. 

The risk in a fund also depends on its creditworthiness. If the bond issuer can manage timely payouts and repay the principal amount on maturity, the fund is said to have a high credit rating & low credit risk and vice versa. A fund with a low credit rating suffers the most concerning liquidity, which can provoke a panic-like situation for investors in case of emergencies. 

Myth 2: Liquid funds always offer positive returns:

Truth: It’s correct to some extent but only partially. When considering liquid funds, the interest rate risk doesn’t hold much significance as these funds have a maturity tenure of up to 91 days. Also, most fund managers try to invest in funds with high credit ratings to make them less risk prone. Yet liquid funds can produce negative returns owing to the market risks. 

If you are investing in liquid funds, we suggest you perform a background check on various available fund schemes. You can explore a range of top-performing liquid funds with Glide Invest and select the one based on your needs and financial goals.

Myth 3: Liquid funds require massive investment amounts to drive returns: 

Truth: It’s a common belief that debt funds are only for corporate and institutional investors who can invest in large amounts. However, this fact holds when investors purchase debt-related instruments from secondary markets. Individual investors can start investing in debt funds with as low as Rs 1000 through mutual funds. You can directly visit the AMC website or intermediates platform like Glide Invest to start investing in liquid funds. 

Myth 4: Liquid funds work like other equity funds: 

Truth: No. Even though liquid funds are a category of mutual funds, they don’t work like equity funds. Liquid funds are actually debt funds that invest majorly in debt-related securities such as corporate bonds, government securities, and money market instruments. These funds offer decent returns on moderate risk levels. 

On the other hand, equity funds invest in stocks, shares, bonds, etc. These funds have a better ability for capital appreciation, but they are the riskiest. 

Myth 5: Liquid funds offering higher returns are always the best to invest in:

Truth: Sadly, reality tells another story. Before you get carried away with a fund’s performance, it’s crucial to analyze its portfolio closely. As we discussed earlier, liquid funds are debt funds. So each debt fund comes with a credit rating. The higher the credit rating, the better the fund quality and the lesser its exposure to credit defaults (credit defaults occur when a bond issuer isn’t able to make timely interest payments or repay the principal amount on maturity). 

A firm with a low credit ranking tends to offer higher returns to its investors as compensation for the risk they are putting them in. So if a fund is performing well, it may be the reason that its portfolio contents are riskier instruments. Besides, low credit rating funds are more exposed to liquidity risk. Be careful in their regard and analyze the fund thoroughly before investing in them. 

Now that you are well aware of the liquid funds, we are sure this information will help you make the right investment decision for yourself. Remember, the success of liquid fund investment boils down to how you invest in them. With due diligence in line with your risk appetite, age, and goals, you are sure to accumulate the wealth you intend to.

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