Last Updated on 22/03/2022 by Deepak Singla
Liquid funds are a type of short-term mutual funds that invest in debt securities. These provide several benefits but the most noticeable one is that they offer high liquidity. This means that liquid funds can be redeemed easily. In fact, you can redeem it after one day of buying. The maximum maturity period of this type of mutual fund is just 91 days.
If you are confused about liquid funds meaning or which liquid fund to invest in, then this article will help you out. Keep reading to find out about the best liquid funds in India and everything else you should know before investing in liquid mutual funds.
In the article
What are Liquid Funds?
Liquid funds are a type of debt mutual funds. These invest in a specific type of investment tool that is known as debt securities. 
Such debt securities include commercial papers, bank fixed deposits, treasury bills, and other such certificates of deposits that have a maturity period of 91 days only.
- A major advantage of investing in such funds is that they have high liquidity.
- The redemption demand of the investors is fulfilled easily because of the low maturity period.
- Ideal for people looking for low-risk investments with a short investment tenure.
How do liquid funds work?
Basically, liquid mutual funds serve two functions and those are providing high liquidity and protecting your investment amount. Your fund manager will shortlist good quality debt securities. Then, they invest your capital as per the scheme’s regulations.
They also need to ensure that the average maturity period of your portfolio does not exceed 91 days. If the maturity period is shorter, then your investment will be much less affected by the interest rate fluctuations.
So, the fund manager needs to make sure that the maturity of each security they invest your money in, matches with your portfolio’s security. Liquid funds are reputed to provide higher returns than bank fixed deposits and savings accounts. This is how you get higher returns on your investment.
Who should invest in Liquid Funds?
Liquid funds are popular for offering high liquidity as compared to other investment options. But, they do not provide high returns. So, if you are someone who wants to earn some interest on your savings that is kept idle, then liquid mutual funds might be a good option for you. Also, these are recommended if you want an investment tool to achieve your short term goals.
These funds offer a high-interest rate of 8% to 9% p.a. as compared to a savings account that provides only 3% to 6% p.a. interest (on an average). So, liquid funds are a good alternative to your savings bank account.
Liquid funds have hardly any risk, default, or volatility associated, so these are good options for investors with low-risk tolerance. However, this minimal risk perk comes only with the high rated (AAA or AA) best liquid funds.
But, we recommend you not to put your entire emergency savings in the best liquid funds. The reason is that the funds’ redemption will credit your money on the next working day only.
Features of Liquid Mutual Funds
a. Exit Load of Liquid Mutual Funds
No exit load is applicable to your investment if you decide to withdraw the sum invested after 7 days of purchasing the liquid fund. Hence, it is a very convenient scenario for the investor.
b. Volatility of Liquid Fund Investment
Volatility is the amount of fluctuation in the Net Asset Value (NAV) in the best liquid mutual funds. Liquid funds have a maturity period of at most 91 days. So, their NAV remains constant and does not fluctuate at all
c. Lock-in Period of Best Liquid Funds
There is no lock-in period of liquid funds. You can redeem a liquid fund anytime. You can choose to stay invested for 1 day to 3 months or even more. The maximum maturity period of liquid mutual funds is just 91 days. This is very low as compared to other investment tools.
d. Liquid Fund Returns
Liquid funds offer fixed returns as they invest in securities with fixed interest rates. At the time of maturity, the investor receives his sum invested along with the fixed interest provided by the securities.
Also, liquid funds have the ability to provide better returns than bank fixed deposits and savings accounts. Many people consider liquid funds to be an alternative to a savings account as both their liquidity and returns are higher.
e. Liquid Funds Taxation.
The taxability of the returns from liquid funds depend on the period for which you hold the fund:
- If you withdraw the invested sum before 3 years, then Short Term Capital Gains (STCG) will be added to your tax slab and then it will be taxed accordingly.
- If you redeem the sum after 3 years of investment, then Long Term Capital Gains (LTCG) of 20% will be imposed along with indexation.
Top 11 best liquid funds to invest in India 2020
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1. Franklin India Liquid
Franklin India Liquid Fund is a type of security that invests in debt instruments and has a maximum maturity period of 91 days. It provides higher returns in a short tenure. It has constantly outdone its benchmark and has become one of the best investment options for investors looking for high liquidity. This is why it is one of the top 5 liquid funds in India. The overall risk associated with this fund’s portfolio is comparatively low as it invests in a mixture of short term debt securities and money market instruments.
| Minimum Investment Amount | INR 10,000 | |
| AUM | INR 2,703 cr. | |
| 1 yr returns | 6.34% | Benchmark: |
| 3 yr returns | 6.98% | Benchmark: |
2. Nippon India Liquid
Nippon India Liquid Fund is an open-ended plan that thrives to provide you with best returns via investment in debt/ money market securities. It has high liquidity and minimal risk associated. This fund is ideal for people who wish to invest their corpus in tools with the intention of generating higher returns than that provided by savings bank accounts. The underlying securities are highly rated, and so, the risk associated is negligible.
| Minimum Investment Amount | ||
| AUM | INR 26,033 cr. | |
| 1 yr returns | 5.33% | Benchmark: |
| 3 yr returns | 6.60% | Benchmark: |
3. Aditya Birla Sun Life Liquid
Aditya Birla Sun Life Liquid is a type of open-ended debt fund. It aims to generate high returns along with high liquidity via investment in high-quality debt securities. This plan is ideal for investors who wish to save their money for a short tenure and earn good returns on them. The specialty of this fund is that every security that it invests in is selected after proper research and thought process. The securities with minimum risk involved and high credit ratings are chosen.
| Minimum Investment Amount | INR 500 | |
| AUM | INR 33,418 cr. | |
| 1 yr returns | 5.36% | Benchmark: |
| 3 yr returns | 6.60% | Benchmark: |
4. Axis Liquid Fund
Axis Liquid Fund is a type of mutual fund that necessarily invests in short-term debt securities like commercial papers, treasury bills, etc. You can avail instant redemption facility. You just need to submit an online request, and the money gets credited to your Savings Account in a matter of minutes
| Minimum Investment Amount | INR 500 | |
| AUM | INR 25,860 cr. | |
| 1 yr returns | 5.32% | Benchmark: 4.21% |
| 3 yr returns | 6.59% | Benchmark: 4.22% |
5. Baroda Liquid Fund
Baroda Liquid Fund is a type of open-ended debt scheme that generally invests in debt securities that mature within 91 days. Your investment portfolio’s 70.56% or above will be comprised of A1+ rated bonds. This makes it a low-risk investment tool for a short tenure. This fund has been consistent in beating benchmark rates and provided optimal returns over a short tenure.
| Minimum Investment Amount | INR 5,000 | |
| AUM | INR 3,373 cr. | |
| 1 yr returns | 5.20% | Benchmark: |
| 3 yr returns | 6.54% | Benchmark: |
6. UTI Liquid Cash Plan
UTI liquid cash fund aims to generate high returns with high liquidity by investing in bonds with a maturity period of 3 months. It is one of the top liquid funds in India. This will help you earn better than what you will earn from a bank account. Also, the risk associated with this fund is very low.
| AUM | INR 27,081 cr. | |
| 1 yr returns | 5.19% | Benchmark: |
| 3 yr returns | 6.32% | Benchmark: |
7. ICICI Prudential Liquid Fund
ICICI Prudential Liquid Fund has been one of the top 10 liquid funds in recent years. These are best for saving the amount you don’t need now but can use later to meet your emergency requirements.
| Minimum Investment Amount | INR 99 | |
| AUM | INR 57,335 cr. | |
| 1 yr returns | 5.22% | Benchmark: |
| 3 yr returns | 6.55% | Benchmark: |
8. Tata Liquid Fund
Tata Liquid Fund aims to produce high returns combined with high liquidity. The risk of losing your money is negligible though not guaranteed. This fund is suitable for keeping your money safe for emergency needs. It was launched on 1st September 2004 by the Tata Mutual Fund. It has been one of the best performing liquid funds in the market ever since then.
| Minimum Investment Amount | INR 5000 | |
| AUM | INR 17,858 cr. | |
| 1 yr returns | 5.34% | Benchmark: |
| 3 yr returns | 21.09% | Benchmark: |
9. Kotak Money Market Scheme
Kotak Money Market Scheme provides you with better returns than that provided by your bank on your savings account. There is no risk of incurring a loss but that is not guaranteed either. It intends to produce returns by making investments in money market instruments of up to 1 yr. Also, it is one of the best liquid funds to invest in.
| AUM | INR 36,040 cr. | |
| 1 yr returns | 5.17% | Benchmark: |
| 3 yr returns | 6.51% | Benchmark: |
10. L&T Liquid Fund
L&T Liquid fund aims to generate high returns by investing in bonds with a maturity period of 3 months. It is suitable for saving the money you don’t need now and use it later for emergency needs. It will provide you with better returns than a bank account. You would not incur any loss with these funds.
| AUM | INR 7.906 cr. | |
| 1 yr returns | 5.27% | Benchmark: |
| 3 yr returns | 6.58% | Benchmark: |
Factors to be considered while investing in liquid funds
Risk associated
The underlying assets of a liquid debt fund mature within 91 days, so they are quite volatile too. This is why the NAV (Net Asset Value) of these funds are mostly steady.
Hence, liquid funds are considered to have low-risk associated with them. But, the NAV of the liquid fund could drop if the underlying security of the fund drops. So, liquid funds cannot be thought of as completely risk-free.
Returns
More or less, every liquid fund interest rate is around 7% to 9% while Savings Account gives you an interest rate of 3% to 6% only. It is very clear that the liquid fund returns are much better than the returns provided by banks on Savings Accounts.
You should check out the best liquid fund return rates and choose the one that provides better returns.
Expense Ratio
Liquid funds charge an annual fee for the services they offer just like all other mutual funds. The expense ratio of a mutual fund gives you a precise idea about the same.
A fund with a lower expense ratio means that the fee charged is less and the gains are higher. So, you should choose a fund with a lower expense ratio.
There isn’t excessive buying and selling of securities since the fund manager invests and holds the security of the fund until its maturity. Thus, this fund does not incur any extra expenses and so the expense ratio is so low.
Investment
Liquid funds also serve as an ideal investment option. You can also use a liquid fund as an emergency fund since these offer reasonable returns. Also, the risk associated is extremely low. Liquid funds are developed with a 3-month investment horizon. So, make sure that you have a proper investment plan before purchasing a liquid fund.
How to evaluate Liquid Mutual Funds?
a. Investment Plans
Your financial goal should be very clearly set in your mind. Liquid funds have worked very well as emergency funds as they have high liquidity. Besides, you get higher returns with these funds. Hence, you can redeem your money quickly in an urgent situation.
b. Objectives of the fund
Liquid funds are considered to be the debt funds with the least risk associated. This is because the NAV of liquid funds does not fluctuate much. The underlying assets of liquid funds mature in the range of 60 to 91 days. Hence, the NAV of liquid funds does not get affected by the change in the underlying asset prices.
You need to keep in mind that the liquid funds are not entirely risk-free. This is because the NAV of liquid funds could suddenly drop due to a sudden drop in the credit rating of your liquid fund’s underlying security. So, remember that liquid funds are not totally risk-free.
c. History of the fund
The historical performance of a liquid fund is something you need to study before judging it though it is not a foolproof indication that the liquid fund is good. If your mutual fund has been consistent in its performance over the years, then it is generally expected that the fund will deliver the same kind of results in the future too.
d. Credit Quality
Try to choose the liquid fund whose investment portfolio’s debt securities are highly-rated and have high CRISIL ranks. This will ensure that the credit risk of your liquid fund is minimized.
The credit risk can be defined as the risk associated with defaulting of principal amount and interest. Now, this risk is generally low in case of debt securities that have a comparatively high credit rating.
e. Expense Ratio
The expense ratio will give you an idea of how much of your investment is spent on managing the fund expenses. If a fund has a lower expense ratio, then that indicates that you will receive a higher take-home return.
So, the expense ratio determines the operational efficiency of any mutual fund (including liquid funds). It is advisable to choose a liquid fund with a low expense ratio in order to enjoy better returns and performance.
f. Investment Horizon.
The liquid funds are usually for investing your surplus money over a short duration. Generally, most liquid funds mature within 91 days. So, this will help you to understand the performance aspects of the underlying securities.
After that, you can also consider investing in ultra-short-term funds in order to avail of better returns.
Taxation on Liquid Mutual Funds
The liquid funds are subjected to 2 tax slabs: One is for long-term redemptions, and another is for short-term redemptions. So, if you redeem your liquid fund before 36 months, then you shall be eligible for Short Term Capital Gains (STCG) tax.
If you hold the investment for more than 3 years, then long-term capital gains (LTCG) is applicable. LTCG is charged at 20% along with indexation. But, if you opt for availing the dividends, then Dividend Distribution Tax (DDT) will also be applicable at 29.12%.
You May like to read Best Tax saving Mutual Funds: Best ELSS Mutual funds in 2020
How to invest in the Best Liquid Funds?
You can invest in liquid funds in two ways: Online and Offline
Offline:
Fill up the liquid fund form and submit it at a nearby branch of the fund house. Otherwise, you could also invest directly through a broker.
Online:
The easiest way to invest in liquid funds is online. Follow the steps given below to do the same:
- Visit the website of the Asset Management Company that offers the fund you wish to buy. You can also purchase a mutual fund via some online partner website of the fund.
- Choose the plan that you want to invest in.
- Register with your details.
- Duly fill in the details required.
- Make the investment and you are done.
- You will receive a confirmation email and SMS.
How much should I invest in liquid funds?
If you have some idle money, then you can invest that in liquid funds. Many people prefer liquid funds to the savings account. The reason being that Liquid Funds offer a higher interest rate of 8% to 9% p.a. as compared to Savings Account that offers an interest rate of 3% to 6% p.a.
What is the difference between debt fund & liquid fund?
| Features | Liquid Funds | Debt Funds |
| Maturity Period | Liquid funds have a maximum maturity period of 91 days. | Other categories of debt funds have variable maturity periods. Some debt funds mature overnight while some funds like gilt funds mature after 10 years. |
| Liquidity | Liquid funds offer high liquidity as suggested by their name. So, you can easily redeem them within 30 minutes. | Other categories of debt funds do not offer the same level of liquidity. The redemption procedure takes about 2 working days. |
| Risk Associated | Liquid funds involve the least amount of risk among all other debt funds. This is because the maturity period is the lowest.
Hence, the credit risk and interest risk associated with liquid funds are very low. |
Other debt funds have several types of risks associated: Interest rate risk, credit risk, and default risk.
Some debt funds have a high degree of interest risk and credit risk. |
FAQ About Liquid Funds
- Can we opt for SIP in liquid funds?
Ans: Yes, liquid fund investment can be done via a Systematic Investment Plan or SIP mode. However, all fund houses might not offer SIP for liquid funds.
- How long should you invest in Liquid Mutual Funds?
Ans: Liquid funds have a short maturity period that can be a maximum of 91 days. You have the option of staying invested for one day to three months or even longer. You can opt to use liquid funds as emergency funds since they have high liquidity. The liquid fund redemption time is mostly 30 minutes, so the procedure is convenient as well.
- Can I invest a lump sum in liquid funds?
Ans: Yes, you can. Investors prefer investing a lump sum in liquid funds when they are looking for higher liquidity and higher returns over a short tenure.
- When should you invest in liquid funds?
Ans: Experts advise you to invest in liquid funds in the following three scenarios:
- If you want to invest your idle cash somewhere for a short duration, then you should consider liquid funds because they generate better returns (8 to 9%) as compared to a savings bank account (interest rate of 3% to 6%).
- You want to fulfill your short term financial goals in a matter of months.
- You can utilize the Systematic Transfer Plan (STP) to invest the capital collected via a liquid fund in an equity fund in SIP mode. This is a strategy that will help you produce better returns and escape market volatility for a long term investment.
- Are liquid funds tax-free?
Ans: No, the returns on liquid funds are taxable. If you stay invested in them for less than 3 months, then Short Term Capital Gains (STCG) is applicable to the returns. If you stay invested for more than 3 months, then Long Term Capital Gains (LTCG) is applicable at the rate of 20% on the returns generated with indexation benefit.
- Are Liquid Funds better than FD?
Ans: Liquid Funds generally offer higher returns as compared to Fixed Deposits. Also, the maturity period of liquid funds is shorter than that of Fixed Deposits.
Your bank will deduct a tax at source of 10% of the revenue generated from your fixed deposit is more than INR 10,000. The income earned on fixed deposits are added to your income tax slab and then taxed accordingly.
If you fall in the higher tax slab then your FD income would be taxed at 30%. However, liquid funds will bring down your overall effective tax rate to 5% to 8%.
- Do Indian liquid funds have a lock-in period?
Ans: Liquid funds do not have a lock-in period. If you withdraw within the first 7 days, then an exit load will be applicable otherwise it won’t. Also, liquid funds have a maturity period of 91 days at most. So, you can redeem anytime within that period or even choose to stay invested longer.
- Are liquid funds better than Saving Bank Account?
Ans: Yes, liquid funds are considered to be better than Savings bank Account. A savings account offers an interest rate of 3% to 6% on average. But, liquid funds offer a higher interest rate of 8% to 9%. Thus, the liquid fund returns are higher than that of a savings account.
