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Liquid Mutual Funds: Should You Invest Into More Than One Fund? What Experts Say

As the withdrawal cap on liquid mutual funds is Rs 50,000 per day, investors can contemplate allocating money to more funds.

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Liquid Mutual Funds: Should You Invest Into More Than One Fund? What Experts Say

Liquid mutual fund investment should not be made from a long term perspective


Before you parked money into a mutual fund, some sceptic(s) probably told you to refrain from the "risky" investment, and instead play safe by embracing reliable as well as time-tested financial instrument of bank fixed deposits (FDs). There is no denying the fact that market-led financial instruments are relatively illiquid and riskier than the fixed income instrument such as bank's term deposits or fixed deposits. However, if you plan well and allocate the money rationally, then you can enjoy the same liquidity and access funds in case of emergency as and when you require it.

It must be understood that the mutual funds offer the redemption (settlement) option of t+1, which means that if you invest today, you are eligible to redeem the money tomorrow, if you decide to opt for it.

However, there is a cap on withdrawal to the tune of Rs 50,000 from one fund in one day. So, in case you want to access your funds to the tune of (say) Rs 1.5 lakh then it will take you at least three days (from one fund) to do so.

To circumvent this problem, the experts advise depositors to allocate investments to more than one mutual fund so that one becomes eligible to withdraw more than Rs 50,000 in one day's time. For instance, if you happen to stagger your investments across three different liquid funds, then your daily withdrawal limit jumps automatically to Rs 1,50,000 (50,000X3).

However, the investor must be informed that this strategy works only when you foresee the requirement of more than Rs 50,000 with few other investment options to rely on.

"As liquid funds are considered to be least risky along with least volatile among mutual fund category, having 2-3 schemes is advisable to park for contingency fund if the need is more than the set amount (of Rs 50,000 a day)," said Dinesh Rohira, founder and CEO of 5nance.com. 

Also Read: Want To Earn A Regular Monthly Income? 5 Investment Options For You

At the same time, some experts have a slightly varied take on the idea of putting money into more than one mutual fund solely for being eligible to redeem more than Rs 50,000 in a day. They argue that when such an emergency can occur, then instead of liquid mutual fund, one should count on the bank's term deposits and/or savings bank accounts.

"Make sure you do not allocate any emergency funds to equity oriented schemes despite the fact that mutual Funds offer high liquidity and potentially higher returns than other emergency fund options such as savings accounts and fixed deposits," rationalizes Harsh Gahlaut, CEO, FinEdge.

Lakshmi Iyer, CIO (debt) and head of products, Kotak Mutual Fund, echoes the same sentiments. "If diversification is for this purpose (redeeming over Rs 50,000 in a day), it may not be needed," she told NDTV.

At the same time, she doesn't dismiss the idea of diversification within mutual funds as a concept.

"Diversification within mutual funds is a good idea," she said.

Whether investor decides to spread their investment across one fund or more is a very individual decision that should be based on the individual's requirement and the availability. For instance if the investor already has ample funds in bank fixed deposits (FDs) then they shouldn't rely on liquid funds for any contingency.

Either way, the investor must make note of the popular advise that implies that the investments in liquid funds shouldn't be made for any long-term financial goal.

"This amount should however be parked as contingency purpose and not as a long-term investment," said Mr Rohira.



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