These days many Liquid Funds giving us first rate round 7% secure and fewer risky returns. Ought to we spend money on Liquid Funds for Lengthy Time period Targets?

What are Liquid Funds?

Liquid Funds are debt mutual funds the place the fund supervisor has a mandate to spend money on debt and cash market securities with a maturity of as much as 91 days. That is the definition of SEBI.

Nevertheless, this seems to be to me just like the large open place for fund managers to spend money on any debt and cash market safety (even low-rated safety). With 91 days interval, one can cut back the rate of interest danger volatility. Nevertheless, if the fund supervisor took the danger and invested in low-rated papers, then there may be all the time a danger of default or downgrade.

Many could also be shocked by my notion. Nevertheless, should you verify the historical past (Is Liquid Fund Secure And Different To Financial savings Account?), there are cases the place one Liquid Fund crashed by nearly 7% in a single day!!

This incident is a traditional instance and warning to those that BLINDLY consider that Liquid Funds are secure and fewer risky. If the fund supervisor took a BLIND danger, then it’s important to face the danger.

Why are Liquid Funds now giving 7% implausible returns?

It’s all due to the inflation trajectory by which we’re presently in. Increased inflation led to greater rates of interest. This impacted a fall in bond costs. The impression of that is extra on long-term bonds than the short-term bonds. Simply due to this, the one-year returns present round 7%.

Simply due to this reverse cycle, we will’t assume that going ahead sooner or later Liquid Funds will generate 7% returns safely.

Ought to we spend money on Liquid Funds for Lengthy Time period Targets?

As I discussed the explanation for such a implausible efficiency of liquid funds for a yr, assuming the identical for the longer term isn’t price it. As an alternative, allow us to attempt to perceive the chance of previous returns by contemplating the varied rolling returns of a liquid fund. I’m contemplating a liquid fund which is the oldest and in addition of the best AUM. I discovered that SBI Liquid Fund (Direct) is the oldest with the best AUM (Rs. 58,177 Cr).

I’ve taken the final 10 years of NAV historical past. Therefore, we now have round 3,741 each day knowledge factors.

Allow us to attempt to perceive the volatility for 1-year, 3-year, and 5-year rolling returns.

1-Yr Rolling Returns of SBI Liquid Fund Direct-Progress 2013 to 2023

Discover the volatility. The utmost return is 9.16%, the minimal is 3.25% and the typical is 6.29%.

3-Yr Rolling Returns of SBI Liquid Fund Direct-Progress 2013 to 2023

The utmost return is 8.4%, the minimal is 4.1% and the typical is 6.12%. The typical returns of 1-year rolling returns and 3-year rolling returns look nearly the identical!!

5-Yr Rolling Returns of SBI Liquid Fund Direct-Progress 2013 to 2023

The utmost return is 7.8%, the minimal is 5.2% and the typical is 6.28%. The typical returns of 1-year rolling returns, 3-year rolling returns, and 5-year rolling returns look nearly the identical(6.29%, 6.12%, and 6.28%)!!

If the Liquid Funds are SAFE (avoiding default and credit score danger) and fewer risky, then why such a variety of return prospects even after holding for five years?

The reply is though Liquid Funds could to a sure extent utterly keep away from the default or downgrade danger by investing in authorities securities or cash market devices, they will’t run away from rate of interest danger.

Therefore, simply due to the upper inflation and better rate of interest cycle, if these funds are producing round 7% returns in a yr doesn’t imply they supply the identical first rate returns sooner or later. When you look again on the historical past, you discover from the above charts that there have been sure durations the place the identical Liquid Funds generated implausible returns of over 7.5% for five 5-year holding interval. However on the identical time, we should perceive the explanations behind this and in addition by which curiosity cycle we’re in.

Why one should spend money on Liquid Funds?

As a result of latest tax modifications in Debt Funds (Debt Mutual Funds Taxation From 1st April 2023), there isn’t any nice benefit of PARKING (I’m not utilizing the phrases investing) your cash in Liquid Funds.

Then who can and when one can contemplate Liquid Funds? One can use the Liquid Funds for his or her short-term objectives like lower than 2-3 years and uncertain of precisely after they want the cash. In any other case, a easy Financial institution FD or RD is sufficient to cater to your necessities.

Yet another factor to suppose is though identify of those funds is LIQUID, they aren’t as liquid as your Financial institution FDs (should you booked via web banking). Normally, it takes a day or two to redeem your cash from liquid funds. On the spot redemption in Liquid Funds has sure limitations like both Rs.50,000 or 90% of the fund worth (whichever is earlier).

Contemplating all these features, don’t make investments randomly simply due to the present returns. Quite than that, you should have a transparent goal in selecting the Liquid Funds. As I’ve given one traditional incident of previous credit score danger historical past, don’t be within the mistaken perception that Liquid Funds are secure. As an alternative, take a look on the portfolio after which take a name.