How to Invest in Liquid Funds

Liquid funds are more than just the cash you keep under the mattress.

Liquid funds are considered account structures or investments that can be readily accessed in a moment's notice. Not all liquid funds are bank accounts. In fact, money managers consider conservative interest-bearing investments with a time horizon of less than three months to be liquid. Investors may wish to go into liquid funds as a reaction to adverse market conditions, waiting on the sidelines until economic data becomes more positive. Even investors who are actively invested in the market should have liquid funds as part of a diversified portfolio.

Instructions

1. Determine the amount of liquidity you need and for what reason. Most household budgets consider three to 12 months of monthly expenses the required amount of liquid assets. For those who are considering liquid assets to wait out a bear market, the asset value may be higher.

2. Consider the access you might need regarding the money. An emergency fund should be liquid with low or no penalties to access it. Those fund with any type of time commitment or penalty should be limited to less than 12 months with no more than a 1 percent penalty.

3. Look at your investment options for liquid funds: bank money market funds, savings accounts, three-month time certificates, low risk no-load mutual funds or short-term debt such as Treasury bills.

4. Place your money in the investment that gives you comfort and rate satisfaction. For example, for someone who truly doesn't anticipate needing the funds, a six-month time certificate may be worth the higher interest rate paid against the possible penalty incurred should a need for the money actually arise.

Tips & Warnings

• Bank accounts are FDIC insured. Bonds and conservative mutual funds involve risk even if they are conservative funds.

References

• Investopedia: Liquid Asset
• NDTV Profit: Liquid Funds