Navigating the highs and lows of the financial markets can be a difficult task. Unfortunately, market crashes and recessions are an inevitable part of the investment journey. While many investors flock to equity funds during bull markets, savvy investors understand the value of a well-balanced portfolio.
Let’s discuss the safety and stability of liquid funds during market crashes and recessions.
Understanding liquid funds
Liquid funds are debt mutual funds primarily investing in short-term debt instruments like government securities, corporate bonds, and money market instruments. These funds are designed to have a low-risk profile and are an excellent choice for investors looking for stability.
Liquidity and market crashes
During market crashes or turbulent times, liquidity becomes a crucial factor. You may need access to your funds without facing unnecessary penalties or waiting periods. Liquid funds excel in this regard. They allow you to redeem your investment quickly, usually within 1-2 business days. This feature makes them an excellent choice for parking money when the market is in turmoil.
Low risk and the stability of NAV
While other mutual funds may suffer significant losses during market crashes, liquid funds typically maintain their stability and net asset value (NAV) within a narrow range. The NAV of mutual funds represents the per-unit value of the fund’s assets. Liquid funds’ focus on low-risk, short-term debt instruments ensures their NAV is relatively insulated from market fluctuations. This stability is a key factor in their attractiveness during uncertain economic times.
Returns during recessions
Although liquid funds prioritise safety and liquidity, they also offer reasonable returns, making them an attractive option during economic recessions. While their returns may not match those of equity funds during bullish phases, they can still outperform traditional savings accounts and fixed deposits. Liquid funds have the potential to provide better returns while preserving your capital.
Tax efficiency is a crucial consideration for investors. Liquid funds enjoy a tax advantage over other fixed-income investment options. If you hold your investment for over three years, you are eligible for indexation benefits, significantly reducing your tax liability. This tax efficiency can further enhance your overall returns.
Diversification is a key strategy to mitigate risk in any investment portfolio. Liquid funds are managed by professional fund managers who diversify the fund’s assets across various short-term debt funds. This diversification spreads the risk and minimises the impact of a default by any single issuer. It adds an extra layer of security to your investments, particularly when economic uncertainties are looming.
Expense ratios matter when evaluating the efficiency of a mutual fund. Liquid funds typically have lower expense ratios compared to equity and hybrid funds. This means that management fees eat up a smaller portion of your returns. These lower expenses can boost your overall returns and make liquid funds even more attractive during market crashes.
To wrap up
Remember, when it comes to your hard-earned money, it’s not just about earning returns but also about preserving your capital when it gets tough. In liquid funds, you may have found the ideal partner for achieving that balance.