Have you ever found yourselves with extra cash lying unutilised in your savings bank account? You might be waiting for a big expense, or a big investment opportunity, or maybe for your emergency fund. But at the same time, do you wish that if it could earn a little more interest than the interest that your bank gives?
That is exactly where Liquid Funds can help you achieve the same. These Mutual Fund category is designed to keep your money safe, accessible, and growing; just a little more efficiently that your savings bank account and even better sometimes than your Flexi-FDs. So let’s explore Liquid Funds.
Quick Summary:
Liquid Funds invest in short-term securities (T-Bills, CPs, CDs) maturing within 91 days. Ideal for parking emergency funds, surplus cash, or short-term portfolio allocation.
Offer instant redemption (up to ₹50,000 or 90%) with quick bank transfer.
Features: high liquidity, minimal credit risk, better returns than savings a/c.
Limitations: small exit loads (if redeemed early), cap on instant access, return fluctuations. Performance has consistently beaten savings accounts and sometimes flexi FDs.
Before investing: check exit load, credit quality, and consult an advisor.
What are Liquid Funds?
Liquid Funds are a category of debt mutual funds that invest in money market instruments that mature in short term, ideally within 91 days. So they typically invest in: –
- Treasury Bills (T-Bills)
- Commercial Papers
- Certificates of Deposits
- Other Government Securities or Debt Securities that mature in 91 Days.
Because of the category mandate, these funds only invest in securities that mature within 91 days, liquid funds carry relatively lower risk and also offer high liquidity. Liquid Funds in essence are designed to give you the liquidity as well as the safety of your investments while offering you returns.
Uses of Liquid Mutual Funds
Liquid Funds typically have one of the three use cases described below
Parking your Emergency Funds
Liquid Funds are a suitable investment avenue for investors who want to park their emergency funds. The money is easily and instantly accessible whenever required and also earn higher returns than your savings bank account.
Temporary Parking your Funds
There are situations in our lives where we have recently sold an investment or received a sum of money which we haven’t decided where it will eventually be invested or we are waiting for an investment opportunity. Liquid Funds are a great option for parking your idle money.
Short-Term Debt Portfolio Allocation
Liquid Funds pose as an ideal investment opportunity for investors looking to invest their short-term debt portfolio allocation. Whether you want to create a regular cashflow from your liquid funds through SWP or you want to have a portion of your portfolio accessible anytime, liquid funds offer liquidity in short time making it an ideal option for such use case.
If you have not already noticed, we mentioned that Liquid Funds offer you Instant Access to your investments. You might be thinking that redemptions of Mutual Funds usually take 2 days to hit your bank accounts but that is not the case with Liquid Funds. Here’s how.
Instant Access Facility (IAF) for Liquid Funds
Liquid Funds inherently carry this feature. SEBI has allowed AMCs to offer Instant Redemption Facility in Liquid Funds and Overnight Funds. While only a few AMCs offer this feature in Overnight Funds, this facility is offered by mostly all of the liquid funds in the category. But what is it?
Instant Access Facility or Instant Redemption Facility allows an investor to redeem their investments in liquid funds almost immediately. An investor can instantly redeem their investments up to 90% or up to ₹50,000; whichever is lower on a single day. The money hits the bank account of the investor usually within 10 mins of redemption order provided that the account is active and registered with the AMC. This ensures that the money is actually accessible in times of emergencies just like your bank account.
However, the amount cap can be a limitation for someone who wants access to higher amounts. This can be tackled by investing in multiple liquid fund schemes or by investing across family member accounts. It is recommended that you check the suitability of the fund as per your risk profile and also whether the facility is available in the fund or not.
Liquid Funds are Ideal for you if:
- You are someone looking for low risk, short term investment avenues.
- You want to park a portion of your emergency fund.
- If you are looking to park your surplus cashflow while you wait for using it or investing it elsewhere.
- You are looking for an investment option for your funds from which you want to generate regular cashflows
Features that make Liquid Funds attractive:
High Liquidity – As these funds invest in securities maturing within 91 days, liquidity risk is low and the exit loads usually do not apply if you want to redeem after 7-15 days.
Instant Redemption Facility – Provides you access to your money instantly just like your bank account and also offers you higher returns. Cap applies.
Minimal Credit Risk – Liquid Funds majorly invest in Government securities which have the highest credit rating, cash, and in AAA rated debt securities and hence carry minimal default risk.
Better Returns than Savings Accounts – Historically, liquid funds have provided higher returns as compared to savings bank accounts and sometimes even better than short term fixed deposits.
Limitations of Liquid Funds
Exit Load – Most Liquid Funds though do not carry exit loads after 7-15 days of holding period, a small % of exit load applies if you need to redeem it earlier.
Cap on Instant Access Facility – The overall cap of 90% or ₹50,000 whichever is lower is low and can limit instant accessibility in case a higher amount is required.
Return Fluctuations – The returns earned by Liquid Funds vary with Interest Rate cycles. Unlike Fixed Deposits where you can lock-in rates, it is not possible to do the same in case of liquid funds.
Performance of Liquid Funds
As we discussed, Liquid Funds historically have offered higher returns than savings bank account and, in some periods, better than short term flexi FDs too. So, let’s take a look at their historical performance. We have compared the liquid category returns as well as two funds in the same category. Funds selected here are just for comparison and is not an investment recommendation.
| Particulars | 3 Month Returns | 6 Month Returns | 1 Year Returns | 3 Year Returns |
| Debt: Liquid Funds | 1.43% | 3.19% | 6.82% | 7.03% |
| Aditya Birla Sun Life Liquid Fund | 1.45% | 3.27% | 6.95% | 7.15% |
| Edelweiss Liquid Fund | 1.44% | 3.25% | 6.94% | 7.13% |
Source: Value Research, EduFund Internal Research. Returns less than 1 Year are simple returns.
How to choose the right Liquid Fund
Before you invest, it is important for you to know a few factors that you should consider before selecting a liquid fund to invest in:
- Exit Load:- Exit Load can impact your net returns earned if you need to redeem your liquid funds immediately after investment. Check if your fund has exit load and how much. Also check the days after which the exit load won’t apply.
- Credit Quality:- Most liquid funds have average credit quality rating of AAA but still it doesn’t hurt to check if your liquid fund also carries similar securities or not.
While you can compare the factors and find a list of liquid funds suitable for you, it is always wise to discuss with your financial advisor before investing.
Closing Notes
Liquid Funds are often considered as a fund category that is meant to park unutilised money and hence they are not talked about much. But with facilities like IAF, Liquid Funds can act as your secondary bank account to park your emergency funds or to keep your money earning efficiently while you wait for your next investment opportunity.
People Also Ask
1. Are Liquid Funds safe?
Liquid Funds typically invest in securities maturing within 91 days and those that are rated AAA. So yes, they are usually considered safe as the credit risk and interest rate risk remains very minimal.
2. How are Liquid Funds taxed?
Liquid Funds are taxed just like any other debt mutual funds. Any gain arising out of these investments are taxable at the slab rate of the investor.
3. Is Liquid Fund better than FD?
Liquid Funds usually do not offer higher returns than traditional long term FDs but yes they fall at par with short term FDs making them a better alternative for short term investing.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
