Liquid Funds and Fund of Funds: What are They?
In the present age, mutual fund investments are gaining a lot of prominence as compared to other investment options. A mutual fund is an investment vehicle that invests money in various financial instruments like shares and bonds with the money collected from different individuals sharing a common thought process. These mutual fund schemes are designed as per the customer’s preferences like their income levels, risk appetite, expected returns from the investment and so on. Based on these there are various categories of mutual fund schemes like equity funds, debt funds, balanced funds, ultra short-term debt funds, and so on. Two such offspring of mutual fund schemes are liquid funds and fund of funds. So, with the help of this article, let us try to find out what are these two types of mutual fund schemes along with their characteristics and advantages.
A liquid fund is a category of debt mutual fund that invests a predominant stake of its corpus in fixed income securities. However, what differentiates liquid funds from other mutual fund schemes is that the assets forming part of this mutual fund’s portfolio have a very short maturity period of less than 91 days. Some of the assets that form part of liquid funds include treasury bills, certificate of deposits, commercial paper, government bonds, and so on. In addition, these funds can be easily converted into liquid cash depending on the individual’s requirement due to their high liquidity.
These funds can be used by individuals who have idle cash lying in their bank accounts. The volatility of liquid funds is considered to be very less. Since the assets forming part of these funds have a low maturity period, they are generally held until maturity instead of trading. Most of the mutual fund companies like Mirae Mutual Funds, IDFC Mutual Funds, and Axis Mutual Funds offer liquid funds. Some of the benefits of liquid funds are as follows.
· Good Returns: Liquid funds provide good returns for a short duration. In addition, these funds are one of the best instruments to avail high inflation benefits. It because, during high inflation, the government tries to curb liquidity, which results in an increase in the interest rate. Hence, individuals can earn good returns by investing in liquid funds.
· Less Risky: Liquid funds are considered to be less risky as the portfolio’s underlying assets consists of fixed income securities. In addition, the maturity period of the assets is also less.
· No Lock-in Period: Liquid funds do not have any lock-in period due to which individuals can withdraw their money from the mutual funds whenever required. Once, the redemption request it forwarded, individuals can receive money into their bank account within 24 hours.
· No Additional Charges: There are no charges levied on liquid funds in the form of entry load, exit load, and so on.
Fund of funds, a mutual fund scheme is different from other mutual fund schemes. A mutual fund scheme, in general, invests its corpus in assets like shares, bonds, international equity, gold, and so on. However, in case of a fund of funds mutual fund scheme, the corpus amount is invested in various mutual fund schemes. Also, known by the name of multi-manager investment, fund of funds invests its investment in various mutual fund schemes. Here, the unitholders can enjoy greater benefits of diversification by investing in a single fund with lower ticket size. By investing in one single mutual fund scheme, an individual can enjoy the benefits of a plethora of mutual fund schemes making their investment process hassle-free.
If it would not have been for fund of funds, individuals otherwise would require to invest in a single mutual fund and keep the performance record of each fund separately. Fund houses like Aditya Birla Sun Life Mutual Fund, Reliance Mutual Fund, and DSP BlackRock Mutual Fund offer this mutual fund scheme. There are certain advantages of fund of funds that are listed below as follows.
· Greater Degree of Diversification: By investing in a fund of funds, individuals can enjoy a greater degree of diversification since by investing in one fund, they get to access various mutual fund schemes holding different assets.
· Lower Ticket Size: The advantage of fund of funds is that individuals who wish to venture in this investment avenue can enjoy maximum benefits with lower investment amount.
· Due Diligence Process: Fund of funds are required to follow a due diligence process wherein the credentials of the fund manager managing the fund are checked. Even the credential of the fund house is also checked.
Thus, from the above points, individuals can make aware themselves about the two different kinds of mutual fund schemes. However, before investing in any mutual fund scheme, individuals need to understand the modalities of each mutual fund scheme to reap maximum benefits.