How Should One Select the Top Performing Liquid Funds?

Being least risky among the debt fund category, liquid funds invest in the cash equities and money market securities. These securities have maturities up to 91 days or less. The funds under this category are the ideal substitute for a savings account, offer returns of 6-7 per cent per annum. As the name suggests, the funds are highly liquid, and you can also withdraw the amount within 24 hours of investments. There are many liquid funds available in the industry, but some of the top performing funds are provided in the article further, along with some of the important details of it below:

What Are Liquid Funds?

With no restriction of the lock-in period, the liquid funds are those who invest in the treasury bills, commercial papers, bank deposits, fixed income securities, and other debt securities with maturities of 90 days.

However, the liquid funds do not provide very high returns, the investors who have kept idle money should invest in these funds. You can also put the emergency amount in the liquid funds and redeem whenever required. The best thing about these funds is that they do not have an entry or exit load.

On What Parameters the Top Performing Liquid Funds Are Selected?

Before selecting any fund, the funds are getting analysed comprehensively. Various quantitative and qualitative parameters are there on which the funds get selected. These parameters are:

Past Performance: The past performance of the fund is one of the most important details that is being considered before selecting any fund. The consistent past performance of a fund has a proof that the fund is performing well in all the market conditions. How a fund performs in the bearish market condition is equally important to consider before investing in it.

Expense Ratio: Every mutual fund scheme charges a nominal fee from the investors an expense ratio to run the fund. However, for now, SEBI has fixed the upper limit of expense ratio at 2.25%, so a fund could not exceed the limit. The liquid funds generally keep the expense ratio low for providing higher returns.

Ratios to Consider Before Investing: There are a few ratios which provide the internal details of the fund. For example, the portfolio turnover ratio provides the details of portfolio churning, and the Sharpe ratio shows the risk-adjusted returns of the fund. There are some other ratios which are being considered for knowing the best funds are alpha, beta, price-earning ratio, price to book value ratio, and standard deviation.

Fund Management: The major thing on whose philosophy that a fund runs is the fund manager. The experience of the fund manager, how he selects the stocks or securities tell a lot of details regarding the fund. A fund performs on the convictions of fund manager and strategies made by him.

Portfolio Construction: Knowing the details of the portfolio, where a fund has been investing and what kind of papers it is investing are important factors to know before investing in any fund. The strong portfolio helps the fund to run well in downside market.

The top-performing liquid funds that an investor should consider for investment in the year 2018, which have been selected on the above-listed parameters are provided below:

Reliance Liquid Fund (G)

Tata Liquid Fund (G)

Aditya Birla Sun Life Liquid Fund (G)

Canara Rebocco Liquid Fund (G)

Before investing in the above-listed funds, the investors should know whether the funds are providing the expected returns and you are reaching your decided objectives or not. However, no funds guarantee that they will provide good returns, but mostly, the returns of liquid mutual funds are positive at the time of redemption.

Dishika is well-versed with the ups and downs of the financial market and has published articles on mutual fund and SIP. She is associated with MySIPonline.com, which is an AMFI registered mutual fund company.