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Premium: Can Liquid Funds Lose Money?


Liquid Mutual Funds are considered very safe. They can only invest in debt and even there, only paper that matures within 91 days. They have many things they can buy: • Lend money in the call market (overnight borrowing) • Use CBLO to finance (between overnight and a few days) • Buy T-Bills or government securities that are maturing in the next 91 days (government backed, so ultra low credit risk) • Buy corporate paper (commercial paper) or bank paper (certificates of deposit) maturing within 91 days (some credit risk, but shorter term to maturity) In such a case, unless there is a default, why would liquid funds lose money? Now think about this:

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