Liquid Fund Definition

• A liquid investment is one that can be easily turned into cash. This is important for investors who want to quickly sell and profit from certain instruments or want to switch investment spending at a moment's notice. Liquid mutual funds follow these aims, buying up only investments that can be easily sold for cash in the current market. Many of these funds are money market funds, a name for a mutual fund that only invests in safe, short term debt and similar options.
  
  

Benefits

• Investors who use liquid mutual funds benefit from their inherent low risk. The investments that can be turned most easily into cash are the investments that the market has confidence in, and for good reason. These instruments have highly predictable returns and a very low default rate, making it easier for investors to count on their returns. More liquid funds may also be immune from some of the market forces that can drop the values of other investments.
  
  

Common Investments

• Liquid mutual funds focus on several primary investments. One key area is short term government bonds. Government bonds in the United States are some of the most stable investments possible and are highly liquid, especially in their short term forms when other investors can be more sure of future profits. These funds may also invest in bank investment accounts and in business bonds from blue chip companies that are highly stable and are insulated from market problems.
  
  

Yields

• Liquid mutual funds tend to trade yield for their convertibility. This means that investors must be willing to make less profit on a liquid fund. Liquid mutual funds generally outperform bank accounts with higher rates of return, but they cannot produce profits that more aggressive funds make by investing in more risky stocks and less liquid debt instruments.