I’m holding LIQUIDCASE and want to know if the returns on liquid funds increase when interest rates decrease. If so, what’s the underlying reason?
liquid funds invest in short-term debt instruments like t-bills, commercial papers and certificates of deposit. so when interest rates decrease the prices of these underlying bonds or debt instruments typically increase. thus this increase boosts the overall value of the liquid fund thereby improving returns. another explanation is when interest rates drop the yields on new debt securities also drop. however the liquid fund may still hold older bonds with higher yields which improves the funds average return in the short term. also as bond prices rise when interest rates decrease the fund benefits from mark-to-market gains where the current market value of the securities held increases.
No that does not happen for liquid funds.
They hold very short term holdings and there is hardly any change in price for such short term holding.
What does happen is that as interest rate falls, return on liquid funds also fall.
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