Disadvantages of Liquid Mutual Funds
1. Lower Returns: While Liquid Mutual Funds do offer returns when compared to bank savings accounts their returns are lower, than those of equity or other funds with higher risk levels.
2. Market Risk: Although Liquid Mutual Funds are generally considered risk they are still susceptible to market fluctuations. While the impact is relatively minimal compared to equity funds changes in interest rates and credit risk can potentially affect the performance of these funds.
3. Limited Capital Appreciation: Liquid Mutual Funds primarily prioritise capital preservation and liquidity. If your goal is to achieve capital appreciation it may be worth considering investment options such as equity funds or real estate.
4. Taxation: The way gains from Liquid Mutual Funds are taxed may not be as favourable compared to investment options. In some countries short-term capital gains from these funds might be subject to tax rates.
5. Not Suitable for Long Term Goals: These funds may not be ideal for term goals, like retirement planning or wealth creation. If you have an investment horizon it would be advisable to explore mutual fund categories that align better with your objectives.
6. Opportunity Cost: Although Liquid Mutual Funds offer safety and easy access, to funds there could be a trade off. If these funds were instead invested in slightly higher risk options they might yield returns.