These days many Liquid Funds giving us respectable round 7% protected and fewer risky returns. Ought to we put money into Liquid Funds for Lengthy Time period Objectives?
What are Liquid Funds?
Liquid Funds are debt mutual funds the place the fund supervisor has a mandate to put money into debt and cash market securities with a maturity of as much as 91 days. That is the definition of SEBI.
Nonetheless, this appears to be like to me just like the broad open place for fund managers to put money into any debt and cash market safety (even low-rated safety). With 91 days interval, one can cut back the rate of interest threat volatility. Nonetheless, if the fund supervisor took the danger and invested in low-rated papers, then there’s all the time a threat of default or downgrade.
Many could also be stunned by my notion. Nonetheless, for those who examine the historical past (Is Liquid Fund Protected And Different To Financial savings Account?), there are situations 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 protected and fewer risky. If the fund supervisor took a BLIND threat, then it’s important to face the danger.
Why are Liquid Funds now giving 7% unbelievable returns?
It’s all due to the inflation trajectory during which we’re presently in. Greater inflation led to increased rates of interest. This impacted a fall in bond costs. The affect 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 are able to’t assume that going ahead sooner or later Liquid Funds will generate 7% returns safely.
Ought to we put money into Liquid Funds for Lengthy Time period Objectives?
As I discussed the explanation for such a unbelievable efficiency of liquid funds for a yr, assuming the identical for the long run will not be value it. As a substitute, 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 very best AUM. I discovered that SBI Liquid Fund (Direct) is the oldest with the very best AUM (Rs. 58,177 Cr).
I’ve taken the final 10 years of NAV historical past. Therefore, now we have round 3,741 every day knowledge factors.
Allow us to attempt to perceive the volatility for 1-year, 3-year, and 5-year rolling returns.
1-12 months Rolling Returns of SBI Liquid Fund Direct-Development 2013 to 2023
Discover the volatility. The utmost return is 9.16%, the minimal is 3.25% and the typical is 6.29%.
3-12 months Rolling Returns of SBI Liquid Fund Direct-Development 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!!
5-12 months Rolling Returns of SBI Liquid Fund Direct-Development 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 threat) and fewer risky, then why such a variety of return potentialities even after holding for five years?
The reply is regardless that Liquid Funds could to a sure extent utterly keep away from the default or downgrade threat by investing in authorities securities or cash market devices, they’ll’t run away from rate of interest threat.
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 respectable 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 unbelievable 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 during which curiosity cycle we’re in.
Why one should put money into Liquid Funds?
Because of the 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 take into account 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 one more factor to assume is regardless that identify of those funds is LIQUID, they aren’t as liquid as your Financial institution FDs (for those who booked by web banking). Often, it takes a day or two to redeem your cash from liquid funds. Instantaneous redemption in Liquid Funds has sure limitations like both Rs.50,000 or 90% of the fund worth (whichever is earlier).
Contemplating all these points, don’t make investments randomly simply due to the present returns. Slightly than that, you could have a transparent function in selecting the Liquid Funds. As I’ve given one traditional incident of previous credit score threat historical past, don’t be within the improper perception that Liquid Funds are protected. As a substitute, take a look on the portfolio after which take a name.