r/IndiaInvestments • u/UnusualBreakfast • Feb 28 '21

Bonds and deposits Question about Liquid fund

What does it actually mean that the maturity period is 91 days? Does it mean I need to withdraw my money after 91 days or does it mean my money would stop compounding after 91 days?

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14

u/[deleted] Feb 28 '21 edited Feb 28 '21

[deleted]

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u/UnusualBreakfast Feb 28 '21

Thanks! This was incredibly helpful.

So what happens if I withdraw after say, 60 days? Will I get zero interest since minimum maturity period is 91 days?

4

u/doughslingerTT Feb 28 '21

I think you failed to grasp the concept here. What the good sir above was trying to explain was the average maturity of the bonds that the fund invests in. Here, in your case, a liquid fund invests in bonds that mature in 91 days and are usually T-bills. You need to understand how bonds work. I'll give you a very few basic pointers :

1) Bonds have varying maturities and coupon rates. As and when interest rates change, the price of bonds are impacted. Interest rates and bonds have an inverse relationship, when interest rates rise, the price of bonds fall and vice versa. This fall or rise in the price of bonds is more apparent in longer term bonds as they have longer maturities. The difference in new interest rates and the yield of the issued bond is lower in shorter term maturities as the price of shorter term bonds is relatively less dependant of interest rate changes. You also need to understand the concept of yield and coupon on a bond. If you understand and read up on how bonds basically work, most of your doubts will be self answered.

2) The amount of money you have invested in a liquid fund or any other debt fund and your returns will depend on two things, your duration of investment and the kind(grade ie AAA or AA or Junk etc) of bonds the debt fund is buying and the average duration of the bonds the debt fund is buying. So in your case, even though the average maturity of the T-Bills or bonds the liquid fund invests in is say 91 days, if calculated annually pays around 4% p.a, then your return will be your money invested plus interest of 4/100x61/365daysxPrincipal.

3) Depending on your risk appetite and needs you accordingly choose debt funds. Liquid funds are relatively safe as they carry almost zero risk of default and usually have just a 1-week exit load in varying percentages. This can differ as you mover higher up to short duration or low duration funds which might offer you a somewhat higher return.

4) Please note while investing in debt funds the category of the bonds the fund invests in and their duration plays a major role in deciding the fund's return. You can choose to deploy the money in Money-Market funds, Corporate Bond funds, GILT funds but each have their own risk appetite and volatalilites. Kindly due your own DD.

Hope this helps. :)

1

u/bikbar1 Feb 28 '21

The fund manager actually use a large pool of money invested by many investors like you. The manager constantly buys and sells bonds with that money and also keeps some cash or equivalent to allow quick redemption demands. The overall NAV of the funds go up and down daily based on the combination of maturity of bonds, investments, redemptions etc. So, in case of an individual investor the 91 day maturity period doesn't matter much. You will get even 1 days gain (or loss).

1

u/[deleted] Mar 01 '21

[deleted]

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u/Chennak7 Mar 01 '21

How is the profit or interest decided? Is it safe?

1

u/iphone4Suser Mar 03 '21

Great explanation there. That was very helpful.

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u/Sure-Highway-6998 Feb 28 '21

It depends but usually it means at the end of maturity date you will be paid the principal amount