Keep Your Money Safe and Liquid During Election Jitters: Take a Look at Liquid Funds

April 16, 2024 Mutual Fund

General elections are a time of immense national focus; they shape the course of the country for years to come. In the dynamic world of finance, periods of general elections often bring about a surge in market volatility.

Investors often grapple with uncertainty during this period, unsure how their investments will react to election outcomes and policy changes. This can lead to fluctuations in stock prices and potential erosion of wealth.

In addition, it could be unsettling for investors, especially those with short-term financial goals or a low tolerance for risk.

Understanding Election-Induced Volatility and Its Impact

Financial markets thrive on stability and predictability. When these factors are disrupted, as often during elections, it can lead to price fluctuations or volatility. Stock prices might swing wildly, and the value of your investments can fluctuate considerably. This volatility can be nerve-wrecking for investors; various factors contribute to increased volatility, including:

• Policy Uncertainty:  Political parties often propose contrasting economic policies. Investors are unsure about the economic and fiscal policies of the potential new government. This uncertainty can lead to investors holding off on investments, causing a decline in stock prices.
• Political Rhetoric:  Heated political debates and campaign promises can create a sense of unease in the markets, leading to price swings.
• Geopolitical Tensions: Elections can exacerbate existing geopolitical tensions, leading to market jitters as investors weigh potential disruptions to trade and global stability.
• Global Market Reactions:  Depending on the political landscape and potential outcomes, international investors might react by withdrawing funds from the country, further impacting the market.
• Investor Sentiment: The lead-up to elections is often marked by heightened anxiety among investors. This can lead to knee-jerk reactions and a flight to safety, causing significant price movements in the equity market.

[Read: 3 Best Liquid Funds for 2024 – Top Liquid Mutual Funds for 2024]

Why Liquidity Matters During Elections

While some investors might choose to ride out the market volatility during elections, others might need access to their funds in the short term. Here’s why liquidity is crucial during this period:

• Emergency Needs:  Life throws curveballs, and unforeseen expenses can arise anytime. Keeping some money readily available during elections provides a safety net for emergencies.
• Taking Advantage of Opportunities:  If the market experiences a sudden downturn, having liquid funds allows you to capitalise on buying opportunities at potentially lower prices.
• Meeting Short-term Goals:  If you have short-term financial goals like a down payment on a house or a planned vacation, keeping your funds liquid ensures they are accessible when needed.

Do note that the election’s outcome can significantly impact policies, regulations, and investor sentiment, leading to market fluctuations. This uncertainty can create a need for liquidity or easy access to your cash.

If you’re looking to safeguard your finances while keeping them readily accessible during this crucial time, liquid funds can be a compelling option. If the market experiences a sudden downturn due to election jitters, having liquid funds allows you to capitalise on these dips.

Therefore, during elections, liquidity acts as a financial buffer. It ensures you’re prepared for unforeseen needs while also allowing you to take advantage of potential market opportunities.

[Read: Do General Elections Matter for the Indian Equity Markets]

Liquid Funds: A Smart Bet for Uncertain Times

Liquid Funds are a type of debt mutual fund that invests in highly secure short-term instruments like treasury bills, certificates of deposit (CDs), and commercial papers. These instruments typically have maturities of up to 91 days, minimising interest rate risk.

Liquid Funds offer a compelling solution for investors seeking safety and liquidity during election-induced volatility. Here’s how they can help:

• Low Volatility:  Liquid funds invest in highly secure instruments like treasury bills, certificates of deposit (CDs), and commercial papers. These instruments have very low inherent risk, making them less susceptible to market fluctuations.
• High Liquidity:  Liquid funds offer investors the ability to redeem their investments quickly and easily, typically within 24 hours. This ensures you have access to your money when you need it most.
• Preserves the Purchasing Power of Your Money: While liquid funds may not offer the high returns of stocks or mutual funds, they typically provide returns that outpace inflation.

Benefits of Investing in Liquid Funds During Elections

By incorporating liquid funds into your investment portfolio during election season, you can potentially mitigate the volatility. Liquid funds can help shield your portfolio from the sharp price swings experienced by stocks and other equity-based investments during election periods.

The easy redemption feature of Liquid funds ensures you have uninterrupted access to your cash, allowing you to address emergencies or seize investment opportunities that might arise. Liquid funds offer a predictable stream of income, which can be crucial for meeting regular expenses or short-term financial goals during uncertain economic times.

[Read: Power Your Portfolio: 5 Sector & Thematic Funds to Consider Around General Elections]

Choosing the Right Liquid Fund for Your Portfolio

With a plethora of liquid funds available, selecting the right one for your needs is crucial. Here are some factors to consider:

• Investment Horizon: Liquid funds are ideal for short-term goals (less than 3 years), such as emergency funds or upcoming expenses. Define your investment horizon and choose a fund with maturities closely aligned with your needs.
• Returns: Liquid funds offer returns that typically outpace inflation but are generally lower than equity or debt funds with longer maturities. Prioritise safety and easy access over chasing high returns for liquid fund investments.

List of Top 5 Liquid Mutual Funds for 2024

Data as of April 15, 2024
Do note past performance is not an indicator of future returns
The securities quoted are for illustration only and are not recommendatory.
(Source: ACE MF, data collated by PersonalFN Research) 

Liquid funds recorded the highest net inflows around Rs 49,468 crore in January 2024, the returns in such schemes are decent as protection of capital remains of utmost importance. A well-performing liquid fund endeavours to beat its benchmark as well as its peer funds, however investors must also verify that the fund has done well consistently.

You can verify this by evaluating its past returns, do note historical returns are not an indicator of future results they only give you an idea of the scheme’s performance.

• Expense Ratio: The expense ratio represents the annual fees charged by the fund manager. Lower expense ratios translate to higher returns for you. Compare expense ratios of different liquid funds to find a cost-effective option.
• Exit Load: Some liquid funds penalise investors who redeem their investments within a specific period. Opt for funds with a low or no exit load for maximum flexibility, especially if you need quick access to your money.
• Credit Quality: Liquid funds invest in debt instruments with varying credit ratings. Look for funds that primarily invest in instruments with high credit ratings (AAA or equivalent) to minimise the risk of default.
• Fund House Track Record: Consider the reputation and track record of the fund house managing the liquid fund. Choose a fund house with a proven history of managing debt instruments and delivering consistent returns.
• Minimum Investment:  Some liquid funds have a minimum investment amount. Ensure it aligns with your available funds.
• Tax Implications:  The tax treatment of liquid funds can vary depending on the investment horizon. Choose a fund that aligns with your tax strategy.

To conclude…

Elections are a necessary part of a healthy democracy, but they can also be a source of financial anxiety for investors. By understanding the impact of volatility and the importance of liquidity, you can make informed decisions to safeguard your finances.

Liquid funds offer a valuable tool to navigate this period with peace of mind. Remember, a diversified portfolio and a long-term perspective are key to weathering any market storm, election season or not.

This article first appeared on PersonalFN here