What is the probability of a liquid mutual fund giving negative returns over a six month period? It is often advised that it is better to park your money into liquid fund than keeping the same in bank FD. But, I am a bit skeptical regarding returns of liquid fund. Please throw some light on this issue.
The portfolio of liquid funds generally comprise of securities which are papers that have a very short - time maturity period which would be less than 180 days. The fund managers usually invest the money in Treasury bills, Certificate of Deposits (COD), Commercial papers, etc. These securities are less sensitive to interest and default risk.
The NAV of liquid funds in fact has never lost value except on one particular day on 15th July 2013 when the RBI had decided to tighten liquidity in the market and had raised the interest rate by 2%. At that particular time, the Indian Rupee was depreciating in value, RBI had intervened in the forex market and removed the excess liquidity from the system to halt the rise in speculative trades in the currency market. The NAVs had dropped in the range of 0.07% - 0.40%
This was a rare incident which triggered the drop in the NAV for 2-3 but apart from that there has been no negative returns for investors who had parked their money in liquid funds. It is still a better option than keeping the same in a Bank FD.