Liquid Mutual Funds

  • Liquid Mutual Funds

  • No Exit Load, No Lock-In Period

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Liquid Fund Name 3-Year Return 5-Year Return
UTI Liquid Fund7.25%7.8%
ICICI Prudential Liquid Fund7.22%7.8%
Kotak Liquid Fund7.2%7.78%
Axis Liquid Fund7.26%7.82%
Aditya Birla Sun Life Liquid Fund7.26%7.84%
Reliance Liquid Fund7.25%7.82%
HSBC Cash Fund7.27%7.82%
Indiabulls Liquid Fund7.37%7.95%
Essel Liquid Fund7.41%7.96%

*ORDER does not indicate a ranking of the funds. 

What is a Liquid Mutual Fund?

Liquid mutual funds are simply put, financial instruments whose portfolio consists of “short-term high-credit quality fixed income earning money market instruments” like a certificate of deposit, commercial paper, treasury bills among others. Basically speaking, liquid mutual funds are a type of debt mutual funds that invests in extremely low-risk financial instruments. Liquid Mutual Funds invest in financial instruments with a maturity of up to 91 days. In most cases, the maturity is much lower than the prescribed limit.

This is a mutual fund category which has been deemed to be among one of the safest and the least volatile due to two reasons:

  • This mutual fund scheme only invests in financial instruments with a credit rating (P1+)This is a mutual fund category which has been deemed to be among one of the safest and the least volatile due to two reasons:
  • Volatility is less owing to the fact that the only change in NAV is as a result of the interest income that is received.

The short-term maturity of these instruments means that they are hardly traded in the market. These funds are generally held until their maturity. In lieu of these factors, the NAV or Net Asset Value of these funds only sees a change to the extent of interest income accrued, every day, including weekends.

When to Invest in Liquid Funds?

Ideally, liquid funds are best suited for individuals who have had a sudden influx of cash. It should, however, be noted that the liquid funds are not to be used as a substitute for a savings bank account. The money in liquid funds cannot be withdrawn instantly as you do in an ATM with a savings account. Liquid Funds should generally be used in order to achieve the short term targets. It is not advisable or considered safe practice to keep all your emergency funds in the liquid funds because in case of emergency these funds can’t be withdrawn immediately. It takes one day to release these funds.

In the short term, putting your funds in a liquid fund scheme can prove to be very beneficial in order to gain higher interest and returns. If you have a sudden windfall of monetary resources you can consider putting them in a liquid fund.

The nature of the investment portfolio allocation has been designed in a way to minimize risk/volatility, provided the investment has been made in funds with either “AAA” or “AA” rating.

Benefits of Liquid Fund

Low Risk

Liquid Funds are essentially one of those mutual fund schemes which have the lowest amount of risk involved with them. This low risk and volatility come owing to the low maturity period in addition to the fact that the investment portfolio of this fund essentially consists of high-credit instruments.

High Liquidity

Liquid Funds as the name suggests are particularly high on liquidity allowing investors to redeem investments as and when required. The credits of the redeemed units of the a liquid fund is transferred to the account in a span of 1-2 days

Instant Redemption

There are some liquid funds that facilitate the instant redemption of the acquired mutual fund units/ NAVs. This basically means that in these funds, redeeming the units online will yield the proceeds in your bank account instantly. There is, however, a maximum capping amount for instant redemption of money into your account. The Securities Exchange Board of India has set a cap of ₹ 50,000 or 90% of the portfolio, whichever is lower. Some of the investment schemes in the liquid mutual funds have the provision of being linked to debit cards such as Reliance Mutual Fund. The withdrawals of the following can be made under the Reliance Any Time Money Card:50% balance in the Reliance Liquid Fund Account or Permissible Limits as judged appropriate by the operating bank or ₹50,000 whichever is lower at a VISA Enabled ATM.

Taxation of Liquid Funds

The liquid mutual funds are essentially a type of debt fund which means that these funds attract capital gains taxation. The tax rate depends upon the holding period (time of investment in the financial instrument) of these funds. If the holding period of the funds is less than 3 years or 36 months, then the fund will be eligible for a Short Term Capital Gains Tax (STCG). If the period is greater than 36 months, then the mutual fund investment scheme will be eligible for a Long-Term Capital Gains Tax.

STCG- Charged as per the Slab Rate (Could be as high as 30% )

STCG- Charged as per the Slab Rate (Could be as high as 30% )

Indexation is basically a measure to account for a reduction in your tax liabilities owing to inflation.

Considerations before Investing

Fund Objectives

Liquid funds have been judged to be the least risky of all the debt funds available in the market. The maturity of the underlying assets in these schemes has a time-frame of 60-91 days and due to this, the net NAV of these funds doesn’t fluctuate that frequently. Somehow, this means that the underlying asset price fluctuations do not impact the fund NAV too much. There is, however, a chance of a drop in the NAV if the credit rating of the fund sees a sudden downgrade. This essentially means that the liquid funds are not a risk-free investing instrument.

Funds Expected Returns

Generally, liquid funds provide returns between 7-9%. The returns are significantly higher in comparison to a savings bank account which will only offer a meager 4% of returns. Liquid Fund Returns are not guaranteed, but in the most general cases of investments, these funds have yielded positive returns when redeemed.

You should consider the funds which have a constant good showing in the market. These funds should have a good showing in the market over the past few years say 3-5 years. The fund you select for investment should essentially have a better performance in comparison to its peer funds and should also have outperformed the benchmark indices.


In order to manage your investment, the mutual funds charge a nominal fee known as the expense ratio. For liquid mutual funds, SEBI has given an upper limit of 2.25%. The liquid fund’s manager deploys a strategy of holding till the maturity period in order to manage the fund and in consideration of that, liquid funds have a relatively lower expense ratio in order to provide higher returns over a short time-frame.

Investment Horizon

In most cases, investment in the liquid funds is done in order to contribute surplus cash over a small time-frame say for example – 3 months. In such a short Investment horizon, the full potential of the underlying securities is realized. In case you plan to invest for a longer time period ranging closer to 12 months or more than a year, you can consider an investment in ultra-short-term funds which might yield significantly better returns.

Financial Goals

The financial goals/ objectives with which you’re investing play a pivotal role in the selection of a liquid mutual fund. Your goals and the fund’s objectives should match up for the most part in order for you to invest in that fund. One of the goals that the liquid funds might help you with is the setting up of an emergency fund. Since these funds can be withdrawn within a time period of 1-2 days these can help in times of financial strain and help provide monetary relief.

Fund History

The history of the concerned fund house is also an important criterion to factor in when you’re investing in a particular fund house. Fund houses that have a “good financial history, consistent performance, and strong investors’ trust” are very lucrative to investors. In an ideal scenario, you should go for a fund house that has shown consistently excellent fund performance over the past 5-10 years.

Financial Ratios

Just the plain simple returns of a fund are not enough to determine the performance of a fund. The various financial ratios of the fund have to be assessed in order to properly assess the performance of the fund from multiple angles. Some of the ratios and tools you can deploy in order to examine the overall performance of the fund are as follows:

      • Standard Deviation
      • Sharpe Ratio
      • Alpha
      • Beta

Funds with high standard deviation and beta are riskier than those with lower values of the same. The Sharpe ratio basically tells the risk-adjusted returns of the fund, the higher the Sharpe ratio, the higher the returns for every additional risk unit taken.

Thus, liquid funds are a stable, less risky, and safe investment option for short term financial objectives achievement.