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Liquid funds are a type of mutual fund that is known for their short-term investment horizon and high liquidity. They are designed to provide investors a safe and convenient avenue to park their surplus funds for a short duration while earning a good return. In this blog we will get the overall evaluation of liquid funds.
To understand the performance of liquid funds requires a thorough grasp of return measures. The following important return measures are used to assess how well liquid funds perform:
The annualised yield shows the return the liquid fund produced over the course of a year. It indicates the revenue generated by the fund's underlying investments and is given as a percentage. Better performance is shown by a larger annualised yield since it represents a bigger return on investment.
Rolling returns give an overview of the performance of the fund across various time periods. Investors may assess the fund's consistency and performance in a variety of market environments by using the return across successive periods, such as monthly, quarterly, or yearly, to determine the return.
Total returns include both the income (interest, dividends) and any other capital gains produced by the fund's investments. It is a measure of an investor's overall return over a period of time that takes into account both income and price changes. It is stated as a percentage.
The average of periodic returns over a particular time period, such as one year or three years, is known as average return. It gives investors a better knowledge of the liquid fund's long-term performance and a more clear picture of its returns.
Returns after adjusting for risk take into consideration the degree of risk entailed in the investments made by the liquid fund. The Sharpe ratio, which contrasts the fund's returns to its volatility or risk, is one often used metric. Better success in relation to the level of risk taken is indicated by a greater risk-adjusted return.
It's important to note that return metrics should be evaluated by keeping in mind the other factors such as expense ratio, credit quality, volatility, and investment objectives. Past performance does not guarantee future results, and investors should consider their risk tolerance and investment goals before making any investment decisions or at Cube we recommend you to download the Cube Wealth App or directly get in touch with a Cube Wealth Coach before investing in such assets.
Investors should be aware of the numerous risks associated with liquid funds. Credit risk is the probability of issuer default or payment delay, with lower risk being offered by securities with better ratings. When rising interest rates cause the value of fixed-income instruments to decrease, interest rate risk is present. If the fund has trouble selling the underlying securities because of market circumstances, liquidity risk may develop. Liquid funds are exposed to larger market risks through market risk, which affect underlying assets based on economic and geopolitical developments. Additionally, due to modifications in debt market laws, regulatory risk may have an impact on fund performance. Investors must carefully evaluate these risks and take past performance of the fund across several market cycles into account.
It is essential to assess a liquid fund's performance by contrasting it with pertinent benchmark indexes. Investors can determine if the fund has excelled or underperformed the larger market and its rivals by examining returns relative to the benchmark. Understanding the fund's risk-adjusted performance, asset allocation, investing approach, and tracking error is made easier thanks to this comparison. However, to conduct a thorough evaluation of the performance of the liquid fund, benchmark comparison should be taken into account in addition to other criteria like expense ratio, risk profile, and fund management experience.
Assessing the fund manager's expertise and track record is essential when evaluating a liquid fund. The fund manager's experience, investment strategy, and ability to navigate different market conditions can greatly impact the fund's performance. A proven track record of consistently delivering competitive returns, effectively managing risk, and making informed investment decisions provides investors with confidence in the fund manager's abilities. Considering the fund manager's expertise and track record helps investors gauge the potential for future success and make informed decisions regarding their investment in the liquid fund.
The performance of liquid funds can be affected by a number of variables. When assessing and tracking the performance of such funds, it is essential to comprehend these variables. These are some crucial elements:
The performance of liquid funds is significantly impacted by changes in interest rates. The yields on the fixed-income assets the fund owns may become less alluring when interest rates increase, resulting in a drop in the fund's returns. In contrast, if interest rates fall, the fund's returns can rise as higher yielding securities already in place appreciate in value.
The performance of the fund is greatly influenced by the credit quality of the underlying assets in which it invests. Typically, liquid funds invest in high-quality, low-risk securities. The fund's returns and NAV may suffer if the issuers' creditworthiness declines or there is a rise in defaults.
The performance of liquid funds can be affected by general market conditions, such as economic variables, geopolitical developments, and market mood. The prices and yields of the underlying assets might change, which can have an effect on the returns of the fund.
It's critical to remember that the performance of liquid funds might change over time and that previous performance does not guarantee future outcomes. Investors must regularly monitor these factors and evaluate the fund's performance in light of them in order to manage their investment risks effectively. Alternatively, you can speak with a Cube Wealth Coach who will provide advice based on shifting market conditions and your personal financial situation.
Ans. Reviewing a liquid fund's past returns across several time frames, such as one year, three years, or five years, can allow you to gauge its previous performance. To evaluate the fund's consistency and relative performance, compare its performance to that of its peer group and benchmark index. Take into account elements like rolling returns, annualised yield, and risk-adjusted returns. In order to appreciate the fund's resiliency, consider how it performed in various markets and environments.
Ans. Key factors to take into account while assessing liquid funds are yield, expense ratio, and Sharpe ratio. The fund's underlying investments' return is reflected in the yield. More effective cost management is shown by a reduced expenditure ratio. The Sharpe ratio compares the fund's returns to its volatility in order to evaluate risk-adjusted returns. Additional information about the performance and risk profile of the fund may be gleaned from indicators like tracking inaccuracy, average maturity, and credit quality.
Ans. Comparing the returns of several liquid funds may be advantageous since it enables you to spot funds that have regularly outperformed their counterparts. You can determine which funds have the potential to produce better dividends and make more educated investing selections by comparing returns. Before making a selection, it's crucial to get advice from Cube Wealth Coach by downloading the Cube Wealth App or take into account additional elements like expense ratios, risk profiles, and investment methods to guarantee a thorough analysis.
Ans. When assessing liquid funds, the fund manager's experience is essential since it has a big influence on how well the fund performs. A knowledgeable and qualified fund manager delivers experience, competence, and the capacity to negotiate various market circumstances. Their track record and capacity for making knowledgeable investment selections are key factors in producing consistent returns and successfully managing risks. Therefore, taking into account the fund manager's experience is crucial when evaluating the performance and future success of a liquid fund. You may also download the Cube Wealth App to explore various investment options.
Ans. Yes, liquid funds' performance might change with time. Changes in interest rates, market circumstances, credit quality, and fund manager actions all have an impact on the returns of liquid funds. These variables might create swings in fund performance which might result in fluctuating returns with time. Investors must regularly monitor and analyse the performance of liquid funds to make educated investment decisions and manage their expectations.
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