Liquid funds carry no credit risk, no liquidity risk - True or False?

Posted On Saturday, May 09, 2020


Ideally this should be True!

However, in past few years investors have lost their savings even in liquid which questions the way liquid funds are run.

In the past week we have conducted two webinars, shared our views with media and investors on the ongoing debt fund crisis. Why? Is our liquid fund in problem? NO! Did we do anything wrong? NO! A big NO.

However we are upset and proud at the same time. We are upset that investors have lost their money. Debt funds which are considered safe and liquid failed to payout to the investors when demanded. And we are proud we weren't one of them. We didn't let down our investors. We stood by our investment objective to ensure safety and liquidity for our investors' money.

Liquid funds or any other fund which is meant for short term goals ideally should avoid taking excessive credit or liquidity risk. The latest debacle shows that some debt funds have not fulfilled this basic requirement and took undue credit risk.

Why is taking risk in liquid funds so bad at all?

As the name suggest, liquid funds are short term fund that are meant to be liquid at all times. Which means that any security your liquid fund holds needs to be good enough (need to have enough credit) for buyers to buy when a fund manager wants to liquidate your funds, so he can pay you back. If the credit is poor quality, it becomes difficult to find a buyer.

Yield hunting!! Returns! Higher returns!! Liquid fund investors, were lured with higher returns. Investors fell for the temptation and parked their money which was probably meant for their contingency needs or their kid's school fees which is due in six months or some other short term goal.

In a good market, things were fine, everyone was happy. However it takes just one company to default, and everything collapses. Just like a house of cards. Because there is a negative sentiment which affects everyone around. This happened during IL&FS crisis. Even a small segment of the credit market can create panic.

Time to be clear and careful

Quantum has always being clear that returns in debt funds are capped and if we try to chase returns and ignore credit risk there is a possibility that you can even lose your principal amount.. There is a major downside to all these things and sadly the upside is capped, which simply doesn't make sense. Yield hunting with disproportionate risk doesn't make any sense.

Therefore, going forward what is more important for investors is to choose a liquid fund that aims to mitigate the issue of credit risks (risk of default) and liquidity risks (unable to liquidate/sell the assets to meet redemptions) by investing in safer and more liquid instruments.

Since COVID-19 has elevated the nervousness spell across market categories, we re-iterate to all investors that these are not the times, to try and earn some extra return from your fixed income investments. We believe that the sentiment in the debt market could turn adverse and that it may be prudent to be as risk averse as one can be in their investment portfolios.

Quantum Liquid Fund rightfully invest only in government securities, treasury bills and securities issued by a select few AAA rated Public Sector Undertakings (PSU) which are shortlisted under our proprietary credit research and review process. The fund aims to have very high liquidity, minimum volatility and near zero chances of capital loss (credit risk - risk of default of interest and principal).

Product Labeling

Name of the Scheme & Primary BenchmarkThis product is suitable for investors who are seeking*Risk-o-meter of Scheme
Quantum Liquid Fund

An Open Ended Liquid Scheme
• Income over the short term

• Investments in debt / money market instruments.
Quantum Liquid Fund
Investors understand that their principal will be at Low Risk

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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