Disadvantages Of Liquid Funds

Liquid funds are a type of money funds that invest in short-term fixed-interest generating money market instruments such as treasury bills and commercial papers.

Liquid funds are perfect for low-risk investors who want surplus money for the short term.

There is no fixed or long-term period for liquid funds, you can withdraw them instantly, and money gets transferred to a bank account in 24 hours. 

Disadvantages of Liquid Funds are no high returns, no guarantee, Taxation, management fees and Exiting charges before maturity.

Disadvantages Of Liquid Funds

No High Returns

Normally, the return rate of a liquid fund is higher than the returns given by bank accounts. But, the returns are not confirmed, but there are usually chances of return. 

The main disadvantage is that there is a huge risk of low-interest rates, and the investors cannot expect huge returns as they can get in the long-term period.

Liquid funds can only be considered by short-term investors because, in liquid funds, there is a low rate of returns. So, if you invest in liquid funds, there are no chances of high returns.

Example: If you invest Rs 10 lakh in a bank account and there is a guarantee that you will get a 5% return rate, but in liquid funds, there are high chances of capital getting disintegrated due to fluctuation, which is not beneficial for the investor.  

No Guarantee

There is no guarantee of returns from liquid funds because they are connected to the market. There are regular changes in the market that affect the interest rate of the liquid funds, so there is no safety in the short-term liquid funds.

There is no guarantee of returns; even the invested capital can also go into loss due to fluctuations in the market. 

Taxation

The profit gained in short-term liquid funds is joined to your earnings, and you have to pay the tax for it, which is a loss for short-term investors.

You will have to pay tax according to the part required for the tax. The short-term investors who pay high-tax according to their income also have to pay high tax from the returns whether the profit is low or high.  

Management Fees

In liquid funds, there is a person, you can say manager, who manages your documents and investment, and in return, he charges management fees.

But, in banks, you do not have to pay any management fees because the bank takes care of your investment. There are fewer chances of high returns; still, you have to pay the required fixed fee to the fund manager. 

Exiting Charges Before Maturity

There is a short-term duration before exiting from the fund, but a small commercial cost is charged if the investor withdraws the money before the specific time ends. 

For example, The short-term investment period is for 15 days, and if you want to withdraw the money on the 9th day, you will have to pay an extra amount to exit early from the fund.

These charges are not very high, but they will get deducted from your profit. 

Final Thoughts

After knowing the disadvantages, it is clear that investing in short-term liquid funds is risky, but it is ideal for investors who want returns in less time. If you want to gain high profits, you should invest in long-term funds projects which can bring huge profits.

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