Your long-term financial plans can go off-track in case of a sudden contingency. Therefore, adequate liquidity in a portfolio is important to manage emergencies, more so in uncertain times like the pandemic itself. Your emergency corpus is the money which needs to be at your call at a very short notice. So, most important when allocating for this purpose is a high degree of safety and liquidity. Those are the kind of parameters that liquid funds can potentially fulfil. Traditionally these funds have remained largely an institutional product used by corporate treasury for parking their idle cash. Over the years, these funds have proven their ability to generate reasonably better returns than a savings bank account and provide so with negligible risk and high liquidity; thereby building a strong case as an avenue for very short-term investing or emergency needs of the retail segment as well. However, in the recent times, with the interest rates hitting their multi-decadal lows, the returns of liquid funds have fallen drastically. When the Reserve Bank of India reduced rates to combat the pandemic situation, liquid funds' returns squeezed and squeezed hard. From over 6 per cent returns two years ago, the returns have fallen to 3 per cent off late. The graph below compares the returns of these funds with those of a savings bank account. In the current context, liquid funds' returns are almost at par with those of savings bank account. But their returns may be slightly better than savings bank account rates if you factor in the tax advantage these funds have over a holding period of three years. Having said that, there are expectations that interest rates may soon start rising pushing the yields upwards. In fact, yields have rebounded off late and if this trajectory hopefully continues
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