What are Liquid Funds - Meaning, Returns & Benefits (2024)

Imagine you have some extra cash lying around and you’re not sure what to do with it. You could leave it in your savings account, but you know you’re not earning much interest there. Alternatively, you could invest in the stock market, but you’re worried about the volatility and the risk involved. This is where liquid mutual funds come in.

Liquid funds can be a middle ground between keeping your money in a savings account and investing in the stock market. Therefore, in the blog, we will discuss the liquid mutual funds meaning and how it can be a great investment opportunity to park your extra cash. Let’s begin.

What are Liquid Funds?

As the name suggests, the liquid fund meaning is to invest predominantly in highly-money liquid market instruments and debt securities of very short tenure and hence, provide high liquidity. Liquid funds or liquid debt funds are a type of investment option that can allow you to park your idle money for a short period of time, typically 1 day to 3 months.

What are the Underlying Instruments of Liquid Funds?

These funds invest in highly liquid money market instruments like Treasury Bills (T-Bills), Commercial Papers (CP), and Certificates of Deposit (CD). They are a great option for those who want to earn a higher return on their savings compared to traditional savings accounts, without taking too much risk. Simply put, these funds are like a piggy bank where you can deposit your money and earn interest on it, while having the flexibility to withdraw it whenever you need it.

Top 5 Liquid Funds of Companies

To understand the list of liquid fund investments better, it’s time to look at the best liquid funds of companies.

Liquid Fund NameFund Size (in Cr)Return
Quant Liquid Funds₹1,808 +5.60%
Mahindra Manulife Liquid Fund₹564 +5.29%
Birla Sun Life Liquid Fund₹32,542+5.28%
Edelweiss Liquid Fund₹2,192+5.26%
PGIM India Liquid Fund₹495+5.26%

Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top liquid fund companies in India in the list is from 8 November, 2023. However, for real-time updates on stock prices and market trends, visit thesmallcase stocks collectiontoday!

How Liquid Funds Work?

The primary objective of life liquid funds is to provide a high degree of liquidity and safety of principal while generating modest returns. Unlike other mutual funds, liquid funds do not have a lock-in period and allow investors to withdraw their funds quickly and easily.

The minimum investment in liquid funds is usually low, making it accessible to new investors. Thus, you can purchase and redeem liquid fund units through their mutual fund houses or investment platforms. If you invest in a liquid fund, the fund manager may invest the money in short term money market instruments with high credit ratings, ensuring that your liquid capital is secure while generating returns in the form of interest income.

Therefore, various factors such as liquid funds interest rates, inflation, and credit risk influence liquid funds returns. However, top liquid funds returns are usually higher than traditional savings accounts and fixed deposits.

Overall, it can be a convenient and safe investment option for investors who require high liquidity funds and low risk. However, it’s advisable to do due diligence and understand the liquid funds investment objective, portfolio composition, and associated risks before investing in any mutual fund.

What are the Factors You Should Consider Before Investing?

Before investing, it is essential to consider the following factors:

  • Risk and Returns: Evaluate the risk and return profile of the fund and ensure it aligns with your liquid investment options and risk tolerance. These funds may offer relatively low-risk investment options with modest returns.
  • Expense Ratio and Other Costs: Check the expense ratio and other costs associated with the fund, as they can impact your overall returns. Lower expense ratio funds may result in higher returns for investors.
  • Minimum Investment and Exit Load: Check the minimum liquidity investment amount and exit load of the fund before investing. Some funds may have a higher minimum investment amount, while others may impose an exit load if you redeem your investment before a specified period.
  • Credit Quality of Underlying Securities: Check the credit quality of the underlying securities in the fund’s portfolio. These are typically invest in high-quality debt instruments with low credit risk, but it is essential to check the credit ratings of the securities.
  • Liquidity of the Fund: Check the liquidity of the fund, as it is essential to ensure that the fund can meet your redemption requirements. Highly liquid fund units can have the ease of buying or selling, which refers to liquidity.

Who Can Invest in Liquid Funds?

Investing in liquid funds can be wise if you prefer a short-duration investment option with lower risks and have a large amount of cash that isn’t invested anywhere. Since many investors choose this option as a stepping stone to investing in equity funds, you can initiate a systematic investment plan or SIP in liquid funds to get exposure. Thus, equity funds exposure will provide you with the benefit of Rupee Cost Averaging.

Now, since we have covered the basics, let’s understand how you can invest in liquid funds via a step-to-step process.

How to Invest in Liquid Funds?

Investing in liquid funds can be a relatively simple process, and it can be done in a few easy steps. Here’s a step-by-step guide:

  • Open a Demat Account: To invest in liquid funds, you need to have a Demat account. You can open a Demat account with a registered stockbroker or through an online platform that provides Demat account services.
  • Select a Fund: You may choose liquid investments that suit your needs and financial goals. There are several funds available in the stock market, and you can research and compare their returns, portfolio composition, and risk factors before making a decision.
  • Fill in the Application Form: After selecting a liquid fund, fill in the application form provided by the mutual fund house or the investment platform through which you want to invest.
  • Provide KYC Documents: Provide your KYC documents, such as PAN card, Aadhaar card, and bank details, to complete the investment process. You can also complete the KYC process online through various platforms.
  • Invest: After completing the KYC process, you can invest in the liquid fund through net banking, debit card, or cheque payment. You can choose to invest a lump sum amount or opt for a Systematic Investment Plan (SIP) to invest regularly.
  • Monitor your Investments: It is essential to monitor your liquid fund investments regularly and keep track of the fund’s performance and portfolio composition. You can also redeem your investments anytime if you need the funds.

What are the Returns on Liquid Funds?

Liquid mutual funds, including Liquid BeES, may offer moderate returns compared to other types of mutual funds such as equity or debt funds. The fund returns can primarily influenced by the prevailing interest rates in the economy, as these funds primarily invest in debt securities with short maturities. The Liquid BeES return, being an exchange-traded fund (ETF) in India, is based on the performance of highly liquid debt instruments.

The liquid fund returns can be relatively stable and less volatile, making them an ideal investment option for investors with a low-risk appetite. The average liquid BeEs return over the past few years have been in the range of 3% to 5%.

Therefore, it is important to note that the liquid fund or Liquid BeES return are not fixed and may vary based on market conditions and the performance of the underlying securities. However, they may have provided higher returns than traditional savings accounts, which might make them a popular choice for investors looking for a low-risk investment option with moderate returns.

What is the Tax on Liquid Funds?

Here’s what you need to know about the tax on liquid mutual funds in India:

  • Taxation Rules: They are taxed based on the holding period and the type of income earned. If you hold the fund for less than three years, it can be considered a short-term capital gain, and the gains are added to your income and taxed at your applicable income tax rate. If you hold the fund for more than three years, it can be considered a long-term capital gain, and the gains are taxed at 20% with indexation.
  • Impact of Indexation: Indexation is the adjustment of the purchase price of the asset for inflation over the holding period. Indexation can help reduce the liquid funds tax liability on long-term capital gains. The indexed cost of acquisition is calculated using the Cost Inflation Index (CII) published by the Income Tax Department. The higher the CII, the lower the tax liability.
  • Taxation of Dividend Income: Dividend income from liquid mutual funds is taxable in the hands of the investor. The mutual fund house deducts a Dividend Distribution Tax (DDT) before distributing the dividend to the investor. The DDT rate for individuals can be 25% plus surcharge and cess, and for corporate investors, it is 28.84% plus surcharge.

Advantages of Best Liquid Funds

Here are the advantages of the best liquid funds that you might be helpful.

  • Cost-Efficiency: It can be less expensive than actively managed debt funds. This may result in a relatively higher take-home return due to their lower expense ratio.
  • Lower Risk: They tend to have lower risk levels because the underlying securities typically mature within 91 days. This might reduce the potential for volatility in these funds.
  • Flexibility: Being open-ended mutual funds, they may offer the flexibility to redeem your units at your convenience. However, it’s important to note that a small exit load may be imposed if you redeem within seven days from the date of allotment.
  • Efficient Processing: Redemption requests are typically processed within one working day. In some cases, certain they may offer the option of instant redemption.

Risks of Liquid Funds

Short term liquid funds are a type of debt mutual fund with a maturity of up to 91 days. This can make them a relatively low-risk investment option, but there are still some risks to be aware of before investing.

  • Credit Risk: They typically invest in high-quality securities, but there is still some risk of default, especially if the issuer’s financial condition worsens.
  • Interest Rate Risk: They invest in short-term securities, so the impact of interest rate movements can be relatively low. However, if interest rates rise significantly, the value of the fund’s portfolio may decline, and investors may lose money liquid.
  • Inflation Risk: Inflation risk is the risk that the purchasing power of your investment may decline over time due to inflation. They may offer lower returns than other types of investments, so there is a possibility that your investment may not keep pace with inflation.

To Wrap It Up…

In conclusion, liquid mutual funds can be a good investment option for investors who seek high liquidity and moderate returns with low risk. These invest in highly liquid debt instruments with a short maturity period, making them an attractive option for individuals, corporations, and institutions with surplus cash balances. They may offer higher returns than traditional savings accounts and fixed deposits while maintaining a low-risk profile.

Overall, liquid mutual funds can be a great addition to the investment portfolio, providing stability and liquidity while generating modest returns. However, it’s advisable to carefully consider the associated costs, taxation rules, credit quality of underlying securities, and liquidity of the fund before investing.


1. What are the top liquid funds in India?

The top liquid funds in India 2023 have been listed as follows:
1. Quant Liquid Direct Fund-Growth
2. Mahindra Manulife Liquid Fund Direct-Growth
3. Aditya Birla Sun Life Liquid Fund Direct-Growth

Note: This information is provided for educational purposes and is not intended as a recommendation or endorsem*nt.

2. What is liquid money?

Liquid money is cash or assets that can be easily converted to cash without losing value. It is the most accessible form of wealth.

3. Do liquid funds in India have a lock-in period?

No, liquid funds in India do not have a lock-in period. You can redeem your investment at any time without penalty.

4. How liquid bees work?

Liquid beEs meaning are exchange-traded funds (ETFs) that comprise bonds issued by Indian public sector companies. They can provide investors with low-cost exposure to a diversified portfolio of these bonds, enabling liquidity and income from periodic interest payments.

5. Can investors opt for SIPs in liquid funds?

Yes, investors can opt for SIPs in liquid funds. SIPs can be a good way to invest in liquid funds because they allow investors to build wealth over time and reduce the risk of market volatility.

6. What are the liquid funds examples?

The examples of liquid funds are:Money market funds, Savings accounts, Certificates of deposit(CDs), Treasury bills, Commercial paper and Liquid mutual funds.

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As a financial expert with a deep understanding of investment vehicles, including mutual funds, let me delve into the key concepts discussed in the article about liquid mutual funds.

1. Liquid Funds Overview: Liquid funds are investment options that primarily invest in highly liquid market instruments and debt securities with short tenure, offering high liquidity. These funds provide a middle ground between savings accounts and riskier stock market investments.

2. Underlying Instruments of Liquid Funds: Liquid funds invest in highly liquid money market instruments such as Treasury Bills, Commercial Papers, and Certificates of Deposit. These instruments ensure that the invested money remains secure while providing higher returns than traditional savings accounts.

3. Top 5 Liquid Funds: The article mentions the top liquid funds of companies based on data from November 8, 2023. These include Quant Liquid Funds, Mahindra Manulife Liquid Fund, Birla Sun Life Liquid Fund, Edelweiss Liquid Fund, and PGIM India Liquid Fund. It's emphasized that this list is for educational purposes only, and due diligence is necessary before investing.

4. How Liquid Funds Work: Liquid funds aim to provide high liquidity and safety of principal while generating modest returns. Unlike other mutual funds, they have no lock-in period, allowing quick and easy withdrawals. The funds are invested in short-term money market instruments with high credit ratings to ensure security.

5. Factors to Consider Before Investing: Investors should consider factors such as risk and returns, expense ratio, minimum investment, exit load, credit quality of underlying securities, and liquidity of the fund before investing in liquid funds.

6. Who Can Invest in Liquid Funds: Liquid funds are suitable for investors seeking short-duration, low-risk options for idle cash. They are often used as a stepping stone to equity fund investments.

7. How to Invest in Liquid Funds: The process involves opening a Demat account, selecting a fund, filling in an application form, providing KYC documents, and investing through net banking, debit card, or cheque payment. Regular monitoring of investments is advised.

8. Returns on Liquid Funds: Liquid funds typically offer moderate returns, influenced by prevailing interest rates. The returns are relatively stable and less volatile compared to other types of mutual funds.

9. Taxation on Liquid Funds: Liquid funds are taxed based on the holding period. Short-term gains are added to income and taxed at the applicable rate, while long-term gains are taxed at 20% with indexation. Dividend income is taxable, with a Dividend Distribution Tax (DDT) deducted before distribution.

10. Advantages of Liquid Funds:

  • Cost-efficiency with lower expense ratios.
  • Lower risk due to short-term securities.
  • Flexibility in redemption with efficient processing.

11. Risks of Liquid Funds:

  • Credit risk, although they typically invest in high-quality securities.
  • Interest rate risk, especially if rates rise significantly.
  • Inflation risk, as returns may be lower than other investments.

12. Conclusion: Liquid mutual funds can be a valuable addition to an investment portfolio, offering stability, liquidity, and modest returns. It's crucial to consider costs, taxation rules, credit quality, and liquidity before investing.

13. FAQs:

  • Top liquid funds in India.
  • Definition of liquid money.
  • Lock-in period for liquid funds.
  • How liquid BeEs work.
  • Opting for SIPs in liquid funds.
  • Examples of liquid funds.

This comprehensive guide covers the essentials of liquid mutual funds, providing potential investors with valuable insights and knowledge to make informed decisions.

What are Liquid Funds - Meaning, Returns & Benefits (2024)
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