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A primer on liquid funds and FMPs
Published On , 15 Feb 2018 By ET Wealth
WHAT ARE Liquid FundS? Liquid Funds are those mutual fundswhich investtheir corpusin very shortterm instruments which carry very lowrisk.These instrumentsinclude government’streasury bills,short term money market paperswhich provide high liquidity but come with lowvolatility. Sebi mandates that no Liquid Fund can have papersin their portfoliowith a residual maturity of more than 91 days.
Liquid Funds are idealfor parking fundsfor a very short term,say aboutthree months. Given the factthatrate of interests__on savings bank account, FDs and RDs__have dipped substantially in the past two years,these funds have turned more attractive due to their ability to give higherreturns compared to competing products.
WHAT ARE FMPS?
Asthe name suggests, xed maturity plans(FMPs) are those closed-ended mutualfund schemeswhich are launched with a pre-announced tenure.At the end ofthe tenure the investors gettheir money back alongwith the returnsthatthe fund had generated during the tenure ofitsinvestment. Funds usually give investorsthe option to roll overtheir money (principal and return)from the just-ended FMP into another FMP or any otherfund thatthe investor selects.
Debt-oriented FMPs are mandated to investin papers whose residual maturity is at most matcheswith the tenure of the fund orthe residual maturity islessthan the tenure ofthe fund. Most FMPs do nottake high risk and investin highly rated papers.
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