Can liquid funds can be considered as emergency funds

The liquid fund investments are subject to minimum 7 day’s exit load on a graded basis, and as the name suggests, some liquid funds with insta redemption facility allow redemption up to 50, 000/-  credited instantly to your bank account. This liquidity feature makes liquid funds  as one of the options to consider along with parking your money in bank deposits.

Liquid funds are generally less volatile and have relatively lower risks as compared to equity mutual funds. Due to their short duration, liquid funds returns are subject to lower interest rate risk and thereby less prone to volatility.  Even though returns received from Liquid funds are not guaranteed as compared to fixed deposits, but they are less risky than equity funds.

Investors look at the liquid funds to invest to create an emergency fund as they are liquid. Ideally, they are designed for investors with a 3-month investment horizon. Since the central bank RBI has maintained a low-interest rate environment to revive the economy from the pandemic-induced economic deceleration, returns from liquid funds  are muted . Nevertheless, due to their liquidity and relative safety of underlying investments, they are a good option to consider among mutual funds to create an emergency corpus. Depending on their liabilities, investors can consider parking an emergency corpus equivalent to 1 to 12 months of monthly expenses.

Since liquid funds have a short duration of not exceeding 91 days, this prevents the fund’s NAV from getting impacted significantly as the interest rate fluctuations are minimal. The returns or gains made from liquid funds are subject to taxation. Due to their short-term holding period, the gains are subject to short-term capital gains (STCG) tax depending on the investor’s income tax bracket.

Liquid funds are an option to consider parking your idle money.


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