Short term funds versus liquid funds

Liquid funds are typically funds in which investors invest in securities that come with a maturity period of up to 91 days. Liquid funds do not come with a lock-in period and therefore the assets are not held for a long period. While short-term funds are funds in which investors put their money in securities with a maturity period ranging from 7 days to 18 months. Short-term funds serve as the best option for those who wish to invest their money for over 30 days to 9 months.

Why Short term funds deliver better returns than liquid funds?

In the case of liquid funds, the amount of interest accrued on debt funds is divided into the days the fund holds the security. Since the security price is steady and stays that way, the funds show linear growth. The liquid funds tend to disburse money on a one-day period basis and have the need to mark-to-market. Though short-term funds need mark-to-market and are somewhat more fickle when compared to the liquid funds in a 90-day term, one can invest their money in a good mix of both debt funds and equity funds to cushion the market volatility better.  Such a mix also helps them to lower the volatility of their own scheme when compared to the other pure equity investment schemes. The prices of short-term funds tend to change on a daily basis and one can take advantage of these funds to earn more via Systematic Transfer Plans (STPs). Investors can instruct their fund house to switch or transfer a fixed sum at regular intervals to equity and vice-versa depending upon the market condition and help them earn more when compared to liquid funds.

Basic differences between liquid funds and short-term funds

  • Maturity period: In the case of liquid funds, the maturity period is up to 91 days. While for short-term funds, the maturity period ranges from as little as seven days to as long as 18 months.
  • Holding period: The minimum holding period for liquid funds is 2 weeks while in the case of short-term funds, the minimum holding period is 3 months.
  • Risk factor: The risk involved in liquid fundsis somewhat low while that in short-term funds is higher than liquid fund.
  • Expenses: Liquid fund investor may don’t have to pay the exit load charge. But the short-term fund investor may have to pay the exit load charge.
  • Returns: Liquid funds tend to offer higher returns when compared to the savings bank account. While short-term funds tend to offer better returns when compared to the liquid funds.

Market investments can be tricky if you lack proper knowledge about the market and the type of investment tool you are investing in. Short-term funds tend to earn more returns than liquid funds but at the same time, they have a risk factor associated with them. Find out from our professional fund managers and advisors in detail about the tricks and tips that will help your use short-term funds in your favour for an increased earning with limited risks.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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