Liquid Mutual Funds

If you are looking for a debt mutual fund to invest in that will mature within 91 days, then liquid fund investment is the best for you. It is considered a safe investment plan due to it being for a short tenure with a good return.

Safe investment plan

Potentially better returns than bank deposits

Liquidity of investment is high

Investment can be redeemed in a day

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List of Best Liquid Mutual Funds Based on Last 3-Year Returns

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What are Liquid Mutual Funds?

Liquid mutual funds invest in highly liquid debt instruments with very short maturity periods which cater to risk-averse investors who want exposure to securities with satisfactory returns.

A liquid fund invests in short-term instruments with a maturity of up to 91 days. The redemption request for these funds is 1 working day. The hallmark of these funds are that they’re highly liquid, focus on safety and provide a minimum guarantee of return.

Benefits of Investing in Liquid Funds

Liquid fund investment is a good option for an investor who would like to deploy excess funds to gain some returns but would like to keep them available for quick withdrawal. What are some of the advantages of investing in liquid funds?

High Liquidity
The duration of a typical liquid fund investment is usually 1 day to 3 months. They can be redeemed in 1 working day and have a maturity of up to 91 days.
Low Cost of Investment
Liquid Funds have a very low expense ratio and near negligible exit load. which makes it an ideal for someone who is a cost conscious investor.
Almost No Risk Of Default
Liquid Funds invest in securities with good credit ratings where the chance of default is extremely low. For example, liquid funds invest in T-bills which are government backed and thus seen as 100%. Similarly, bonds issued by corporations (commercial papers) with healthy creditworthiness are also found in the portfolio of Liquid Funds.
Emergency Fund
Liquid mutual funds are a good option if you want to build an emergency corpus. This is due to the ease with which funds can be withdrawn and safety of the investment.
Better Returns Than Bank Deposits
Liquid Funds generally give better returns than Fixed Deposits or keeping cash in a savings account at a bank.

Limitations of Investing in Liquid Mutual Funds

Even with their advantages, these funds come with certain limitations to consider

Low Returns
The liquidity fund returns are low compared to other forms of mutual fund investments. As security is the top objective, returns are not the top priority in MF liquid funds. So, if you are expecting high returns from your investments, then considering other mutual funds can be a good choice.
Limited Number of Investment Options
Liquid funds invest in government bonds, commercial papers, and certificates of deposit. This makes the portfolio less diverse compared to other mutual funds.
Inflation Risk
Due to low returns, inflation can cut the gains you make from liquid funds and this becomes especially important the longer you are invested in the fund.

Who should invest in Liquid Funds?

How should you decide whether to pick liquid funds for your investment portfolio? Let’s find out who are the investors who can make the most out of liquidity funds.

Investors with Surplus Funds
Suppose you have received a bonus which you don’t immediately need, you can put it in some of the best liquid funds.
Risk-Averse Investors
Investors who prefer low risk investments or have small amounts of cash to invest and hence look for safe and guaranteed returns options, they can opt for liquid funds.
Investors Seeking High Liquidity
Liquid mutual funds usually have zero exit load with no lock-in period and can be redeemed in 1 working day making them highly liquid investment options.

Points to consider before investing in Liquid Mutual Funds

Evaluate your Goals
You must have a clear purpose to invest in liquid mutual funds. They invest in short-term instruments and generate minimal returns. Keep this in mind while investing.
Risk-Taking Ability
If you are a low risk investor or want to invest some funds with minimal risk, liquid funds are ideal. Given the low risk nature of these funds, returns are also lower than other investment options.
Experience of the Fund Manager
You should check the factsheet of the liquid fund you want to invest in to get an idea of the portfolio, past performance, age and the experience of the fund manager.
Taxation
If you invest in a liquid fund for up to three years, then it will be subject to short-term capital gains tax. If the duration of investment exceeds 3 years, then it will be subject to long-term capital gains tax. The long-term capital gains tax currently stands at 20%

How to Start Investing in Liquid Mutual Funds with INDmoney

Having learnt about liquid fund meaning, you must be wondering how to begin your investment journey. Here’s how you can start investing in liquid mutual funds with INDmoney.

Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer)
Step 2
Once your Free investment account is ready, you can either search for a Liquid fund or go to the mutual fund section and tap on Liquid Funds inside Debt Funds Catalog.
Step 3
Choose a Liquid Fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
You can choose to set up SIP in Liquid Funds or even invest as lumpSum. Once you are on the individual Liquid Fund page click from the bottom “One-time” for lump sum investment or “SIP” for systematic investment plan.
Step 5
Choose the amount that you want to invest as SIP or LumpSum.
Step 6
Set up payments. If you choose to set up SIP in Liquid Funds, you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.

Should You Invest in a Liquid Mutual Fund?

If you want moderate and guaranteed returns then liquid mutual funds are a good option especially when you have extra funds from which you want to derive higher returns than a savings account or a Fixed Deposit. It is also a good option to consider if you are looking to create an emergency fund as it can be redeemed within 1 working day. You can also use an STP to transfer the investment to another mutual fund. On the INDmoney website, you can check the best liquidity funds to see which suits you the most.

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Frequently Asked Questions

Liquid Cap funds are often run by well-reputed AMCs which offer steady and consistent results and have less volatility. Some of the best-performing Liquid funds you can invest your money in 2024 are:

Aditya Birla Sun Life Liquid Fund
Mahindra Manulife Liquid Fund
Quant Liquid Fund
Edelweiss Liquid Fund

Your returns from Liquid mutual funds will be taxed under two categories.

Under Capital Gains: Short-term capital gains at 15%; Long-term capital gains (over Rs. 1 lakh) at 10%.
Tax on Distributed Income Dividend Option: At applicable income tax slab

Yes, Liquid mutual funds have certain risks involved with them, but they are not as high as mid cap or small cap funds. For this reason, the returns on these funds are stable and suitable for conservative investors.

As an investor, you should look at the following features of a Liquid mutual fund before making a decision.

Historical performance of the fund manager
Expense ratio
Past performance of the Liquid MF
Fund portfolio

Try to invest your money in a Liquid fund for a minimum of 3 to 5 years to get a good return after the tenure ends.

The average return on a one-year Liquid mutual fund is generally 16.15% depending on the market. However, as the market is volatile, you cannot expect to get the same return as you got in the previous years.