Liquid fund investing strategies: How to maximise returns and minimise risks with liquid funds

Smart investing doesn’t always have to be about taking risks. If you want to start investing but are cautious about the levels of risk associated with it, then you can consider investing in liquid funds. They are a subset of debt mutual funds that focus on primarily investing in debt securities and highly liquid money market instruments with very short durations.

Liquid funds mature within 91 days and benefit investors with high liquidity and safety of the capital. Although redemption requests are generally processed within one day, most AMCs also offer an instant redemption facility for more quick withdrawals and added convenience.

To get the best value out of your liquid fund investment and minimise associated risks, it is crucial to take the appropriate strategy when allocating investments. This could involve careful portfolio structuring, prudent asset selection, researching funds, and thorough market analysis. Let’s take a closer look at how you can take advantage of these strategies when investing in liquid funds.

  • Diversify your investments

When selecting which liquid funds to include in your mutual fund portfolio, consider diversifying across different fixed-income asset classes including government bonds and treasury bills. This helps reduce the risk of any single investment losing value due to changes in the market or other factors outside of your control.

By diversifying across different asset classes, you also increase the possibility that one asset class may perform better than another, thereby increasing your overall returns on investment when compared to investing only in one type of security.

  • Research fund performance

Past performance is not indicative of future results, but it can give you an idea of how the fund has performed in the past and how volatile the returns have been. So, before you invest in liquid funds, it’s important to check their historic returns along with the track record of the AMC (Asset Management Company) managing it.

Evaluate one-month and three-month returns when looking at fund performance and compare it with the historical performance of different liquid funds. This can help you choose a fund with the best potential returns for your particular needs.

  • Portfolio allocation

When determining the right liquid funds, you should consider their portfolio allocation and which instruments they are investing in. For example, some funds may invest heavily in government securities whilst others may invest more in corporate bonds. Knowing where your money is being invested will help you understand how much risk each fund carries and whether it fits into your overall risk appetite and investment goals.

Additionally, compare each fund’s expense ratio to ensure that your liquid fund returns aren’t impacted by unnecessary fees or commissions.

  • Credit rating

Knowing the credit rating of the underlying security is a key piece of information that can significantly reduce your risk exposure. For example – AAA is the best, AA is good, A a bit below, and so on. Aim for AAA-rated securities as they are of high quality and come with minimal chances of default. It is also important to remember that credit ratings can change over time; thus, it might be beneficial to diversify your investments across different funds so that there is no single asset relied upon too heavily.

To wrap up

With features like quick redemption, reduced risk, and steady short-term income, you can use liquid funds to strengthen your portfolio and meet your financial goals. Moreover, with the number of digital platforms and mutual fund investment apps available today, anyone can invest in liquid funds quickly and with minimum documentation. Just make sure to have well thought out strategies and an eye on your risk appetite to make the most of your investments via liquid funds.