4 Tips To Minimize Risk From Liquid Funds Investment
Liquid fund investments are generally considered to be the safest mutual fund investment out there because they invest in fixed-income securities. But this does not mean that they are 100% safe, which as a matter of fact no investment is. But still, you have got numerous options through the help of which you can mitigate the risk imbibed in your liquid funds. There are a few tips and suggestions which you can use to your advantage to make sure that you do not lose out on your investment. So, without further ado, let us take a look at what you can do to reduce the risk of your liquid funds.
The Credibility of the Issuer
Credit risk is a term that you might come across while investing in liquid funds. It refers to the risk of losing out on the money you have lent to somebody. Hence, it is important that before investing in liquid funds, you should take a look at where you are putting your money into. You should lend your money only to debt fund instruments where the issuer has high credit risk ratings. There are credit rating agencies that rate companies issuing debt funds. The companies that have got AAA ratings hold the least chance of defaulting in their payment. So, in order to mitigate your risk of liquid funds, you should put your money into those funds where the credit ratings of the debt fund issuer are top-notch. This way, you will be assured of the safety of the money you have invested.
Interest Rate Risk and Inflation
A common problem with debt fund investment is the changing rate of interest over the course of time. That’s why debt funds that are kept for a longer period of time are considered highly volatile. The same goes for liquid funds. Although the maximum period for which you can keep the liquid fund is 91 days. There are few chances that there will be significant fluctuations in the interest rate within such a short span but even so, you should factor in the risk. If the inflation is around 5-6% and the expected rate of return on your investment is around 7%, then the real return on interest can be highly affected by the fluctuation. For instance, even a 1% drop would bring your investment down to a return where they can only adjust with the inflation, without bringing in any real return.
One of the best approaches to reduce risk in any form of investment is the diversification of the portfolio. The more you are diversifying the portfolio, the better it is for you to run the risk of a high amount of investment in liquid funds. Make sure the mutual fund you are investing in invests in different fixed-income securities such as government bonds, debentures, and other such money market instruments.
But the best way to mitigate the risk on your liquid fund investment is by taking the help of a third-party financial expert. This could be anything from an online platform to an individual. Make sure to check their credibility. They will advise you or can even manage the liquid funds on your behalf to make sure that the investments are being made with the lowest risk possible. Of course, the thing you have to factor in here is the cost. If you are opting for a fund house, then the expense ratio is something to keep an eye on.
Although liquid funds are not highly risky, you can still manage to lower the risk by following these tips mentioned above. It is also important to assess the timing of your investment as there can be a significant impact if you invest when the interest rate is following a rising or falling trend.