As per SEBI regulations, a liquid fund is one that invests in debt and money market instruments with a maturity of up to 91 days only, such as Certificate of Deposits, Treasury Bills (T-bills), Commercial Paper (CP), etc.
The aim of these funds is to provide capital preservation/safety along with reasonable returns.
Advantages:
- High Liquidity: The main aim of such funds is to provide liquidity for their investors. So, investors can redeem their units at any time.
- Low Exit Loads: These funds have exit loads of less than 7 days. So, you can redeem your funds after 7 days without any penalties.
- Indexation Benefit: Long-term taxation will be calculated based on inflation. Only returns over inflation will be taxable.
- Better Returns: Investors can enjoy better returns than their regular savings bank account by investing in these funds.
Top 5 liquid mutual funds
| S.No. | Fund Name | 3-Yr Annualized Performance |
| 1 | Quant Liquid Plan Growth Option Direct Plan | 5.01 % |
| 2 | IDBI Liquid Fund Direct-Growth | 4.27 % |
| 3 | Mahindra Manulife Liquid Fund Direct Plan-Growth | 4.23 % |
| 4 | Edelweiss Liquid Fund Direct-Growth | 4.23 % |
| 5 | Franklin India Liquid Super Institutional Plan Fund Direct-Growth | 4.22 % |
Source: Morningstar
1. Quant Liquid Plan
Fund analysis:
The fund is the top-performing fund in its category. The fund has a low-risk profile.
The fund has outperformed the category and the benchmark. The fund has invested in high-quality bonds i.e., AAA-rated. The fund can be used to park your emergency funds.
| Pros | Cons |
| High liquidity. Invested in AAA quality bonds. | High expense ratio. |
2. IDBI Liquid Fund
Fund analysis:
The investment objective of the Scheme will be to provide investors with a high level of liquidity along with regular income for their investment.
The Scheme will endeavor to achieve this objective through an allocation of the investment corpus in a low-risk portfolio of money market and debt instruments with a maturity of up to 91 days.
The fund has outperformed the category over the period. The fund has invested 100% in AAA-rated bonds. The fund is a good alternative to fixed deposits (F.D.)
| Pros | Cons |
| Low Expense Ratio.Attractive risk-to-reward ratio. | Fund has underperformed the benchmark over 5-Yr trailing returns. |
3. Mahindra Manulife Liquid Fund
Fund analysis:
The Scheme seeks to deliver reasonable market-related returns with lower risk and higher liquidity through a portfolio of money market and debt instruments.
The fund has outperformed the category average over different trailing periods. The fund holds high-quality debt and money market instruments.
| Pros | Cons |
| Fund has outperformed the category average over different trailing periods. Low expense ratio. | Fund has underperformed the benchmark over 5-Yr trailing returns. |
4. Edelweiss Liquid Fund
Fund analysis:
The fund’s objective is to provide reasonable returns, commensurate with low risk while providing a high level of liquidity, through a portfolio of money market and debt securities.
The fund has invested 100% in debt and money market instruments that have the highest rating i.e., AAA-rated bonds. The fund has delivered consistently better returns than the category average.
| Pros | Cons |
| High liquidity. Invested in AAA quality bonds. | Fund has underperformed the benchmark over 3-Yr & 5-Yr trailing returns. |
5. Franklin India Liquid Fund
Fund analysis:
The fund’s objective is to provide current income along with high liquidity. The fund has relatively high volatility.
The fund is a good alternative to bank accounts along with high liquidity. The fund has invested in AAA-rated bonds and money market securities.
| Pros | Cons |
| Invested in AAA quality bonds. High liquidity. | Relatively high volatility. |
Features of Liquid Mutual Funds
Liquid mutual funds are a type of mutual fund that primarily invests in short-term, highly liquid money market instruments such as government securities, certificates of deposit, commercial paper, and treasury bills.
They are designed to provide investors with a safe and convenient avenue to park surplus funds for the short term. Here are some key features:
- Liquidity: Liquid funds offer high liquidity, allowing investors to redeem their units quickly with minimal impact on the net asset value (NAV).
- Low Risk: These funds invest in low-risk securities, making them relatively safer compared to other mutual fund categories. However, they may not offer high returns.
- Low Investment Minimums: Many liquid funds have low investment minimums, making them accessible for both individual and institutional investors.
- Steady Returns: While liquid funds aim to generate steady returns, the focus is on capital preservation and liquidity rather than aggressive growth.
- Taxability: The gains from liquid mutual funds are subject to taxation based on the investor’s holding period. If the investment is held for up to three years, the gains are treated as short-term capital gains and taxed at the investor’s applicable income tax rate. If held for more than three years, they are considered long-term capital gains and taxed at a flat rate with indexation benefits.
Who are these Funds suited for?
- Corporates: Businesses often use liquid funds to manage short-term cash surpluses efficiently, earning a return on excess funds.
- Individuals: Liquid funds are suitable for individuals who want a safe alternative to traditional savings accounts and are willing to compromise slightly higher returns for greater liquidity.
- Emergency Funds: They can serve as a part of an individual’s emergency fund, providing quick access to funds without the risk associated with other investments.
Major Advantages
- Safety and Liquidity: Liquid funds offer a balance between safety and liquidity, making them an excellent choice for short-term goals and funds you may need at short notice.
- Better Returns Than Savings Accounts: While liquid funds might not offer the same interest as savings accounts, they generally provide better returns due to their investments in higher-yielding money market instruments.
- No Exit Load: Most liquid funds have no exit load, allowing investors to redeem their units without incurring any additional charges.
- Tax Efficiency: The tax treatment for gains from liquid funds can be more favorable than other fixed-income investments, especially for investors in higher tax brackets.
- Professional Management: Liquid funds are managed by professional fund managers who have expertise in managing short-term investments, enhancing the chances of achieving consistent returns.
Conclusion:
Liquid funds are a good alternative to bank accounts. Investors can also park their emergency funds in these mutual funds because of their high liquidity.
This results in better returns than a regular savings bank account as the exit load is maximum for 7 days only.
FAQs
Which mutual fund scheme is highly liquid?
Liquid mutual funds are highly liquid as they primarily invest in short-term money market instruments. They offer quick and easy redemptions with minimal impact on the fund’s net asset value (NAV).
Which is the safest liquid fund?
Liquid funds, by nature, aim for safety and stability. Funds from reputable asset management companies like HDFC Liquid Fund, ICICI Prudential Liquid Fund, and SBI Liquid Fund are generally considered safe due to their investments in high-quality, short-term instruments. However, no investment is entirely risk-free, so research and diversification are still important.
What liquid fund is best?
Determining the best liquid fund depends on your specific financial goals, risk tolerance, and investment horizon. Some reputable options included ICICI Prudential Liquid Fund, Aditya Birla Sun Life Liquid Fund, and Nippon India Liquid Fund. However, it’s crucial to research the latest performance, expense ratios, and other factors, and consider consulting a financial advisor before making a decision.
Disclaimer:
This is not recommendation advice, use it for educational purposes only. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes
