Where do you turn to when there's volatility everywhere? The stock markets are crashing, gold has been falling on sell-offs, and recent incidents have sown doubts about the safety of savings accounts, too. The Sensex had peaked at 42,000 in January. Now, it's touching 26,000, in a matter of days. So where can you park your money safely now?
The truth is there's no one-size-fits-all response to this. All savings and investment instruments carry various risks. You must understand the risks and pick instruments suited to your financial objectives. If your objective right now is the safety of capital and maintaining liquidity, you have two options. One-continue holding money in various savings and deposit accounts, be it at your bank or post office. Two-consider investing in liquid mutual funds. Let's take a deeper dive into these funds.
Liquid funds are debt mutual fund schemes consisting of securities with low maturity durations of 91 days or less. These low-risk securities are typically certificates of deposit, CBLOs, fixed deposits, and government treasury bills which mature in less than 91 days. Due to this, liquid funds do not have the volatility of other debt funds whose underlying securities have longer maturity periods and are thus subject to interest rate risks which cause their NAVs to fluctuate, just as how the NAVs of equity funds would fluctuate. Therefore, liquid funds are considered ideal for short-term cash holdings because there's very little chance of volatility-which is exactly what you're looking for in the current scenario.
As per AMFI data, out of 38 direct liquid fund schemes, 31 have delivered returns of approximately 6% or more in the last one year. Over a three-year period, 33 out of 35 funds have delivered returns of 6% per annum or more. And over five years, 24 out of 29 schemes have returned 7% per annum or more. These returns are comparable to fixed and recurring deposits, and much higher than a savings account. During periods where interest rates were higher, these schemes had delivered in the 7-9% range.
Liquid funds are considered the safest form of mutual funds. When you examine their NAV growth paths, most liquid funds will display a straight diagonal line. It implies no volatility and consistent, daily returns from those schemes, unlike equity funds which will have a roller-coaster-like growth path full of ups and downs. This, however, does not mean that there are no risks in liquid funds. We learnt from recent high-profile corporate defaults that liquid funds, too, could turn dangerously volatile in certain situations. It is advisable to consider investing in schemes only from those fund houses that have performed consistently over the long term.
Ideal case for liquid funds
Beyond the high safety and moderate returns, liquid funds also offer indexation benefits on long- term capital gains (LTCG). Therefore, over a long-ish period of more than three years, its absolute, post-tax returns are likely to be better than those provided by fixed deposits because of indexation benefits. Because of this, liquid funds may attract conservative investors looking for these benefits. However, the ideal use case for liquid funds is using them to park funds for short-term needs.
Liquid funds operate just like FDs- you can enter them today and exit them tomorrow. There is no exit load on liquid funds, unlike all other mutual fund schemes which penalise short-term withdrawals. In the current scenario, you could consider parking a portion of your liquidity in a high-rated liquid fund while you wait for the craziness in the markets to play out. Once that happens, you can transfer your liquid fund holdings into schemes that may deliver higher returns as the markets recover.
You can buy a liquid fund scheme from your preferred fund house, either by visiting their offices with the required KYC documents or by registering online on their websites and completing the transaction via your preferred digital mode. You could also buy liquid funds from online aggregators which will also allow you to compare liquid schemes from various fund houses.
The current market situation calls for calm minds. An investment in a liquid fund scheme may provide you the calm you currently need.
The writer is CEO, BankBazaar.com