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Liquid Fund vs debt funds which one to choose?

Mutual funds are one of the most sought-after investment vehicles in the 21st century because they have the potential to offer better capital appreciation than any other conventional investment avenue. Mutual funds source financial capital from investors sharing a common investment objective and invest the sum accumulated across various money market instruments and asset classes. Mutual funds have designated fund managers, who along with a team of market researchers and analysts, study market movements and build an investment portfolio with securities and stocks that have growth potential. But not all mutual funds invest in stocks or equity related instruments.

Some mutual funds like debt funds are best suited for investors with a moderate to low risk appetite. For those who do not know, debt mutual funds are those mutual fund schemes that aim at generating stable income by investing in fixed income securities and debt related money market instruments. These funds are also considered by investors who have moved away from conventional investment avenues and are looking for other investment schemes. Investors who wish to invest in mutual funds but refrain from exposing their finances to volatile market conditions may also consider investing in debt mutual funds.

What are liquid funds?

While equity funds try to generate long term capital appreciation by predominantly investing in stocks of publicly listed companies, mutual funds like liquid funds build their portfolio with fixed income securities such that the average portfolio maturity is 91 days. A liquid fund invests in government securities, repo rates, commercial papers, certificates of deposit, etc. that have a short maturity date.

Who should consider investing in liquid funds?

If you are someone who has surplus capital that you recently received through a policy in which you earlier invested and if you do not need that money for a few more months, you can invest this money that is sitting idle in a liquid fund and earn interest without worrying about any losses. A liquid fund’s main objective is to offer capital protection and immense liquidity so that the investor can easily redeem the invested sum in case of a financial emergency. Hence, you can even consider investing in this liquid fund for building an emergency fund that can come in handy during an unforeseen financial crisis.

Should you invest in debt funds or liquid funds?

Those who are new to mutual fund investing often find it confusing as there are thousands of investment products to choose from. This is when the investor usually ends up making a mistake and makes the wrong investment decision. However, market regulator SEBI has further categorized mutual funds based on the different natures of the schemes, their asset allocation, and investment objective, etc. so that investors are able to make an informed investment decision.

So, for those who do not know, liquid funds are a product category under debt funds. So you can either choose to invest in liquid funds which is a debt fund itself or choose from a wide range of other debt schemes available for investment. Investors must always keep their financial goals in mind and then target them with schemes that are best suited for achieving those goals. Also, one’s investment horizon and risk appetite play a crucial role in deciding which funds are suitable for their portfolio.

Also, investors must do not just depend on one asset class for all their financial goals as it is less likely for that single asset class to deliver consistently through one’s investment journey. For those who need further assistance, please talk to your financial advisor who might help you make an informed investment decision.