A liquid fund is a mutual fund that can be converted to cash quickly and without penalty. The liquidity of a fund is determined by the percentage of its assets that are in cash or cash equivalents. For example, a mutual fund with 80% of its assets in cash would be considered more liquid than one with only 50% of its assets in cash.
Liquid funds are designed for investors who want immediate access to their money and are not interested in the higher returns offered by other types of mutual funds. They are also a good option for investors who want to keep their money available in case of an emergency.
There Are Two Main Types of Liquid Funds:
Open-end funds and money market funds. Open-end funds are the traditional form of mutual funds; investors purchase shares in the open market at whatever price they are offering. Money market funds invest in short-term debt securities that can be bought and sold like stocks on the major exchanges, which allows them to offer their shares at one price per share (called a net asset value).
While money market funds are more expensive for investors who want to keep a balance in their accounts, they are more liquid because they can trade at the value of their assets. In contrast, because open-end funds sell and redeem shares at the current market price without regard to the fund’s actual asset value, it is possible for a shareholder’s loss in a fund to exceed his initial investment in the fund.
Liquidity is not always desirable, however. For instance, during times of market turbulence investors may be more concerned with capital preservation than the immediacy of access to their investments. Also, some funds are designed for short-term investing, but can also serve as cash equivalents if necessary; these would not qualify as liquid funds.
Perhaps the most popular type of liquid fund is one designed for high-net-worth investors. Once considered to be an “alternative investment,” because assets in the fund are not publicly traded, these funds have since turned into a mainstream form of investing. Most are usually managed by large financial institutions, and while they offer relatively low returns compared to other market assets, they also offer security and the possibility of larger returns if an investor is willing to take on more risk.
Open-end Mutual Funds
Money Market Funds