Liquid Funds

Liquid funds are a type of mutual fund that primarily invests in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposits. The maturity period of these funds is up to 91 days. The liquid funds offer a low-risk avenue with the potential for modest returns. These are ideal investments for investors seeking liquidity and capital preservation.

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What is a Liquid Fund?

A liquid fund is a type of debt mutual fund that invests in highly liquid and low-risk securities that can be easily bought and sold without significantly impacting their price.

Liquid funds are the investment options that invest in the following money market instruments:

  • Treasury Bills (T- Bills)

  • Commercial Papers (CPs)

  • Certificates of Deposit (CDs)

  • Tri Party Repos (TREPs)

The maturity of these mutual funds is the maximum of 91 days. This makes liquid mutual funds an ideal investment plan for you to park your money temporarily for any of the following objectives:

  • Keeping funds for emergency needs

  • Awaiting investment opportunities

  • Alternative to savings accounts for better returns

What are the Features of Liquid Funds?

The key features of liquid mutual funds are listed in the table mentioned below: 

Features Description
Investment Horizon Very short-term, typically a few days to 91 days
Risk Level Low-risk
  • High liquidity
  • The liquid funds are easy to buy/sell
  • Moderate returns
  • Returns are better than savings accounts
Underlying Assets Invest in money market instruments and short-term debt
NAV Fluctuation Minimal NAV fluctuations
  • Tax-efficient
  • Offers indexation benefits
Ideal for
  • Parking surplus funds
  • Liquid funds also act as emergency fund

Top 15 Liquid Funds in India in 2023

The list of best liquid funds available as investment options in India in 2023 are as follows:

Mutual Fund Scheme Fund Size (in Crores) 1-Year Returns 3-Year Returns 5- Year Returns Minimum SIP Amount (in Rs.)
Quant Liquid Fund Rs. 1795 Cr 6.88% 5.32% 5.81% Rs. 1000
Mahindra Manulife Liquid Fund Rs. 744 Cr 7.09% 5.02% 5.36% Rs. 1000
Aditya Birla Sun Life Liquid Fund Rs. 38715 Cr 7.12% 4.99% 5.33% Rs. 500
Edelweiss Liquid Fund Rs. 3194 Cr 7.03% 5% 5.33% Rs. 500
PGIM India Liquid Fund Rs. 434 Cr 7.09% 4.98% 5.32% Rs. 1000
Baroda BNP Paribas Liquid Fund Rs. 9644 Cr 7.06% 5.01% 5.29% Rs. 500
Union Liquid Fund Rs. 2862 Cr 7.08% 4.98% 5.26% Rs. 1000
Axis Liquid Fund Rs. 26890 Cr 7.06% 4.97% 5.29% Rs. 500
Nippon India Liquid Fund Rs. 22686 Cr 7.03% 4.96% 5.31% Rs. 1000
Mirae Asset Cash Management Fund Rs. 10114 Cr 7.05% 4.99% 5.27% Rs. 1000
UTI Liquid Fund  Rs. 22049 Cr 7.05% 4.97% 5.27% Rs. 500
Sundaram Liquid Fund Rs. 4454 Cr 7.03% 4.98% 5.27% Rs. 2000
Franklin India Liquid Fund Rs. 1726 Cr 6.97% 4.93% 5.33% Rs. 500
LIC MF Liquid Fund Rs. 8945 Cr 7.01% 4.95% 5.28% Rs. 1000
Tata Liquid Fund Rs. 20002 Cr 7.01% 4.93% 5.28% Rs. 500

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

How Do Liquid Funds Work?

Let us understand the working of liquid mutual funds from the list mentioned below:

  • Investment in Short-Term Instruments: Liquid funds invest in short-term money market instruments that have high liquidity. 

  • Liquidity: These mutual funds are designed for short-term parking of funds. This allows you to easily redeem your units, usually within one day.

  • Low Risk: The liquid funds are considered low-risk investment options due to their short maturity period and high quality.

  • Stable NAV: The Net Asset Value (NAV) of liquid mutual funds is generally stable at Rs. 1 per unit, providing you a constant value.

  • Returns: While liquid fund returns are typically moderate, they offer better returns compared to traditional savings accounts.

  • Tax Efficiency: These funds provide tax advantages due to indexation benefits for holding periods beyond three years. This results in lower capital gains tax.

  • Ideal for Emergency Funds: Liquid funds are a preferred choice for emergency funds or short-term investment needs.

  • Expense Ratio: Generally, liquid funds have a low expense ratio, enhancing returns for you.

  • Regulated by SEBI: The liquid mutual funds are governed by Securities and Exchange Board of India (SEBI) regulations. This helps to ensure investor protection and transparency.

What are the Benefits of Liquid Funds?

The following list shows the major benefits of liquid funds to help you with better financial decision making:

  • Liquidity: These funds provide easy and quick access to your money, allowing you to redeem your investment at any time.

  • Low Risk: Liquid funds invest in short-term, low-risk instruments. This helps in reducing the risk of capital loss compared to other investment options.

  • Stable Returns: While liquid fund returns may be lower than riskier investments, they offer stable and relatively predictable returns over the short term.

  • No Entry or Exit Load: Many liquid funds do not have entry or exit loads, making it cost-effective to invest and withdraw funds.

  • Tax Efficiency: Gains from liquid funds are usually taxed at a lower rate than traditional fixed deposits, providing tax efficiency.

  • Professional Management: Liquid funds are managed by experienced fund managers who make investment decisions based on market conditions. This helps in optimizing returns for you.

  • Diversification: These funds invest in a diversified portfolio of money market instruments, which spreads the risk across different assets.

  • Ideal for Short-term Goals: Liquid funds are suitable for achieving short-term financial goals due to their short investment horizon and low volatility.

How to Calculate Liquid Fund Returns?

The returns from liquid funds are primarily driven by the interest rates prevailing in the money markets and the quality of the debt instruments held by the fund. 

  1. Mutual Fund Calculator:

    You can calculate the liquid fund returns using a mutual fund calculator. To use a mutual fund calculator, you will need to know the following information:

    • The NAV (net asset value) of the liquid fund

    • The expected rate of return of the liquid fund

    • The investment horizon

    Once you have entered this information, the calculator will estimate the future value of your investment based on the compounding of returns.

  2. SIP Calculator:

    You can also use an SIP calculator to estimate your returns for the Systematic Investments Plan (SIP) in liquid funds. All you need to do is insert the following information in the calculator:

    • SIP investment amount

    • SIP duration

    • Expected annual return rate

    The SIP calculator computes the potential returns generated through regular investments over time. This provides you with a quick analysis of the performance of your liquid fund investment.

What are the Factors to Consider for Investing in Liquid Funds?

Following are some of the key factors to consider when estimating liquid fund returns:

  • Risk Profile: Liquid funds are relatively low-risk investments, but it is essential to align your risk tolerance with the fund's risk profile.

  • Objective and Investment Horizon: Define your investment goals and time horizon. Liquid funds are suitable for short-term goals, typically with an investment horizon of a few days to a few months.

  • Expense Ratio: Consider the expense ratio of the fund, as it directly impacts your returns. Lower expense ratios are generally more favourable.

  • Returns and Past Performance: Evaluate the historical performance of the fund. While past performance does not guarantee future results, it provides insights into the fund's management.

  • Credit Quality of Holdings: Examine the credit quality of the instruments in which the fund invests. Liquid funds primarily invest in short-term debt instruments with high credit ratings for safety.

  • Fund Size: A larger fund size may indicate stability, but excessively large funds may face challenges in deploying funds effectively.

  • Exit Load: Check if the fund has any exit load. Some funds charge a fee if you redeem your investment before a specified period.

  • Tax Implications: Understand the tax implications of investing in liquid funds. Gains from liquid funds held for less than three years are treated as short-term capital gains, while those held for more than three years are considered long-term capital gains.

  • Fund Manager’s Track Record: Assess the track record and experience of the fund manager. A skilled and experienced manager can contribute to better fund performance.

  • Market Conditions: Keep an eye on prevailing market conditions and interest rates, as they can impact the returns on debt instruments.

  • Regulatory Compliance: Ensure that the fund complies with regulatory guidelines and has a good reputation in the market.

Who Should Invest in Liquid Funds?

The following types of investors may find it suitable to invest in liquid funds for their financial needs:

  • Short-Term Investors: Liquid funds are suitable for those looking to invest money for a short period, typically a few days to a few months.

  • Emergency Fund Investors: Individuals seeking a safe and easily accessible place for their emergency funds can consider liquid funds as they provide quick redemption.

  • Low-risk Tolerance Investors: Liquid funds are low-risk investments as they primarily invest in short-term money market instruments, making them suitable for investors with a conservative risk appetite.

  • Corporate and Institutional Investors: Entities like companies, trusts, or institutions with surplus funds often use liquid funds for parking idle cash temporarily.

  • Investors Needing Quick Liquidity: Liquid funds offer high liquidity, allowing investors to easily convert their investments into cash whenever needed, making them suitable for those requiring quick access to funds.

  • Those Averse to Market Fluctuations: Since liquid funds are not exposed to the volatility of the stock market, they can be attractive to investors who want to avoid market fluctuations.

  • Tax-Efficient Investors: For individuals in higher tax brackets, liquid funds can offer tax efficiency compared to traditional savings accounts, as they may be subject to lower taxes.

  • Investors Seeking Better Returns Than Savings Accounts: While providing safety and liquidity, liquid funds may offer slightly higher returns compared to traditional savings accounts, making them appealing to investors looking for a balance between safety and returns.


  • What is a liquid mutual fund?

    A liquid mutual fund is a type of debt fund that invests in money market instruments with maturities of up to 91 days. These investments are highly liquid, as they can be easily bought and sold without significant price fluctuations.
  • Is a liquid fund better than an FD?

    Whether a liquid fund is better than a fixed deposit (FD) depends on your individual investment goals and risk tolerance.

    Here is a table summarizing the key differences between the two:

    Feature Liquid Funds Fixed Deposit (FD)
    Risk Low to moderate Low
    Returns Potentially higher than FDs, but not guaranteed Guaranteed
    Liquidity High Low
    Investment horizon Up to 91 days 7 days to 10 years
    Taxation Taxed as per slab rates Taxed as per slab rates
  • What is the monthly return of a liquid mutual fund?

    Some of the top-performing liquid mutual funds in India, based on their one-month returns are as follows:
    Fund Name One-Month Return
    Aditya Birla Sun Life Liquid Fund 0.59%
    Canara Robeco Liquid Fund 0.57%
    UTI Liquid Fund 0.58%
    JM Liquid Fund 0.59%
    DSP Blackrock Liquid Fund 0.59%
  • Which liquid fund has the highest returns?

    Mutual Fund Scheme 1-Year Returns
    Quant Liquid Fund 6.88%
    Mahindra Manulife Liquid Fund 7.09%
    Aditya Birla Sun Life Liquid Fund 7.12%
    Edelweiss Liquid Fund 7.03%
    PGIM India Liquid Fund 7.09%

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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