The role of liquid funds in wealth creation: Building a foundation for financial goals
Building wealth and achieving one’s financial goals requires diligent planning, discipline and smart investing. While there are many investment options to choose from, liquid funds present a compelling opportunity for conservative investors to grow their money in a steady, low-risk manner.
The benefits of liquid funds
Liquid funds invest in short-term debt and money market instruments with maturity under 91 days. They provide stable returns with low risk, while offering high liquidity. Liquid funds can lay a strong foundation towards achieving long-term financial goals.
Earn steady returns
Liquid funds generate fairly consistent returns in the range of 4-6% post tax, in line with short-term interest rates. While returns are modest, the ultra low risk profile ensures capital preservation and steady income. For conservative investors, liquid funds offer an attractive risk-adjusted return to grow their money gradually.
Maintain high liquidity
Liquid funds offer tremendous liquidity with the ability to withdraw money instantly without exit loads. Redemptions are processed within 24 hours. This makes liquid funds ideal for parking short-term surpluses, managing emergencies or recurring expenses. Investors can withdraw or add funds anytime as needed.
Reduced risk compared to bank deposits
Liquid funds provide similar income returns as bank fixed deposits. However, they carry lower risk given the high quality underlying debt instruments diversified across companies and sectors. The portfolio is actively managed by a professional fund manager. Investors benefit from higher safety compared to locking money in FDs.
Wealth creation with liquid fund SIPs
An SIP or a systematic investment plan is the most effective route for wealth creation over the long term. Here is how to use liquid funds for financial goals:
Identify goal and horizon: Determine the investment goal e.g., child education, retirement and set the time horizon.
Calculate corpus needed: Estimate the total corpus amount needed to achieve the goal based on inflation adjusted future costs.
Allocate to liquid fund SIPs: Assign a portion of the total monthly investment to liquid fund SIPs to build a low-risk foundation corpus.
Top up liquid fund SIPs: Raise liquid fund SIP amount annually by 10-20% depending on income growth to harness the power of compounding.
Switch to debt funds: Two years from goal, switch liquid fund corpus to debt funds for potentially higher returns in the last stretch.
The power of starting early
The longer investment tenure allows liquid fund SIP returns to compound and build a sizable low risk base corpus. Starting liquid fund SIPs early in life accelerates wealth creation. The corpus can be used later to fund other investments for important financial goals.
Conclusion
Liquid funds offer a safe and steady wealth creation avenue for conservative investors. Allocating a portion of one’s investments to liquid funds through SIPs can maximize returns while providing liquidity to manage life’s uncertainties. Be sure to consult an investment advisor to choose a fund that matches your investment goals and to learn how to invest in mutual funds.
