Last Updated on Mar 28, 2022 by Aradhana Gotur

There are different types of mutual fund schemes, and each scheme fulfills a specific investment need. One such scheme is liquid mutual funds. As the name suggests, liquid mutual funds are funds that ensure high liquidity to subscribers by investing their capital in short-term debt instruments. 

What are the features of liquid funds? Which are the best liquid funds in India? How do liquid fund returns look?   

Let’s explore!

This article covers:

What are liquid funds?

Liquid funds are a type of debt mutual fund. These funds invest the majority of their portfolio in short-term debt instruments and money market securities. The assets in the portfolio are very liquid, as per SEBI regulations, only debt products with a maturity period of up to 91 days are chosen for investment. Some of the instruments that constitute a liquid fund’s portfolio include certificates of deposits (CDs), treasury bills (T-Bills), and commercial papers.

List of liquid funds

NameAUMAbsolute Returns – 3MAbsolute Returns – 6M
Quant Liquid Plan493.171.0162.05
Navi Liquid Fund92.320.991.98
BNP Paribas Liquid Fund945.070.891.73
Baroda Liquid Fund4,613.720.891.73
Mahindra Manulife Liquid Fund1,665.440.891.72
Tata Liquid Fund13,061.010.881.72
Franklin India Liquid Fund-Super1,601.720.881.72
IDBI Liquid Fund816.780.881.73
Nippon India Liquid Fund22,489.080.881.72
UTI Liquid Cash Plan26,750.070.881.72

Note:

  • The information is dated 10th March 2022
  • The parameters used to filter the list of liquid funds on Tickertape are:
  1. Liquid funds
  2. Absolute returns – 3 mth
  3. Absolute returns – 6 mth

Features of liquid funds

Liquid mutual funds exhibit the following characteristics:

  • These funds are open-ended schemes. This means that you can invest and redeem any time you want.
  • Since the portfolio’s underlying assets have very short maturity tenures, these funds are highly liquid, hence the name.
  • Liquid funds have no lock-in period even though the underlying assets may have maturities up to 91 days.
  • Liquid mutual funds are subject to regular taxation as applicable to debt funds.
  • Being debt-oriented mutual fund schemes, liquid funds carry a very low risk of volatility.

Why invest in liquid funds?

Liquid funds can prove to be an excellent addition to your portfolio. Here are some reasons why:

  • Low-risk investment

Liquid funds are debt mutual funds. As such, they are not exposed to the volatility risks associated with equity funds. If the equity market is volatile or bearish, you may choose to invest in liquid funds to safeguard your investments.

  • Cost-effective 

Liquid funds are traditionally considered to be cost-effective investments. There is a minimal or nil entry load on investment. Moreover, if you redeem your funds after seven days, the exit load would also be nil. With reduced charges, the investor stands to earn better returns.

  • Instant redemptions

Liquid funds have no lock-in period. You may redeem your investments instantly, whenever you need, or choose to remain invested for as long as you deem fit.

  • Diversified portfolio

The portfolio of liquid funds is invested across a range of debt instruments. Your investment is, thus, invested in a diversified portfolio where the securities are hand-picked by experienced fund managers. 

  • Expert fund management

Liquid funds are managed by expert fund managers who make sure that the fund’s objectives are met. The fund managers manage the portfolio actively for maximum possible returns.

  • Market-linked and inflation-adjusted returns

Liquid fund’s returns are market-linked. You can earn good returns when the market sentiments are positive. Moreover, liquid fund returns are also linked to the economy. So, they are inflation-adjusted and help your investments grow in real terms. 

Factors to consider before investing in liquid funds

Though liquid funds are not exposed to volatility risks, they are affected by other types of investment risks. These include the following:

  • Interest rate risk

Debt funds are inversely related to interest rates. A spike in interest rates can lead to a slide in fund return rates and vice versa. 

  • Credit risk

All debt investments come with the risk of default of the underlying instruments in the portfolio. Though it is very minimal in money market instruments, generally considered safe, the possibility cannot be denied. 

  • Inflation risk

There is a risk of inflation exceeding the fund’s returns. The fund’s success can be partially measured by how successfully it beats inflation.

  • Exit load

Though liquid funds can be redeemed anytime, an exit load would apply if you redeem the funds within the first seven days. This would reduce the net earnings from the fund.

  • Non-guaranteed returns

The returns from liquid funds are not guaranteed. They depend on the performance of the portfolio.

  • Tax aspect

If you redeem the fund within 36 mth of investing, the returns earned would be taxed at your income tax slab rate. On redemption after 36 mth, the tax rate would be 20% with indexation benefit.

Tips for investment in liquid funds

When investing in top liquid funds, here are some tips that would help you make the most of your investment:

  • Liquid funds are ideal for investors with a short-term investment horizon. So, if you want to park your surplus funds for a short time, you can choose liquid funds.
  • You can invest in a lump sum or through SIPs. Go for direct funds for a lower expense ratio and entry load.
  • Compare the available liquid funds in the market. Choose a fund that has offered the best returns consistently. However, remember that past returns do not predict future profitability.
  • Check the portfolio composition of the fund. Choose a fund that invests in high-rated debt instruments for reduced credit risks.

Why invest via Tickertape?

Before deciding to invest in liquid funds, you must conduct basic analysis and thorough market study. Tickertape’s Mutual Fund Pages gives you detailed information about a fund, its performance, and key metrics. Its Tax Calculator also helps you ascertain your approximate tax liability and returns beforehand.

Conclusion

So, understand the concept of liquid funds as well as the benefits that they have to offer. Invest in these funds if they align with your needs. However, before you invest, compare and assess the available funds so that you invest in the best liquid fund, which offers the maximum bang for your buck.

Aradhana Gotur

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