Are liquid funds a good choice to park your emergency corpus?

Holding liquid funds for 30 days would mute volatility - Sandeep Jethwani, Senior Managing Partner and Head of Advisory, IIFL Wealth

Emergency funds in a portfolio are for dealing with unforeseen requirements. The basic premise is complete safety of capital, very high liquidity and reasonable returns.

Bond yields were extremely volatile in March as FPIs sold a record amount of Indian debt. Coinciding with fiscal year end accentuated liquidity squeeze leading to a rise of 100-250 basis points in yields, including the short end, and even liquid funds showed negative returns briefly. RBI’s actions helped in softening bond yields. The infusion of ₹1 trillion under the TLTRO 1.0 reduced the volatility in bond market and stabilized liquid fund returns. RBI also committed to keeping financial system stable and liquid.

Now, the yields in liquid funds have declined closer to the operative policy rate. Some volatility could continue given the covid-19 crisis, the fact that all securities are marked to market, and the low starting yield to maturity. If they are held for at least 30 days, volatility will be mostly muted, given high credit quality. The returns from the overnight segment will be significantly lower, given the huge liquidity surplus in the system.

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