Liquid funds is a category of debt mutual funds that invest in securities with a residual maturity of up to 91 days, Since the instruments have very short tenures, they are not traded actively in the market, and instead held-to maturity by the fund. This subsequently reduced volatility and associated risk.

What are liquid funds?

Liquid Mutual Funds is an open-ended debt mutual fund that aims to provide stable returns with the lowest risk & high liquidity through a portfolio of Money market & Debt securities.

Liquid mutual funds invest mostly in highly liquid money market instruments and debt securities of very short tenure and provide high liquidity.

Liquid Funds invest mainly in very short-term instruments such as government Treasury Bills (T-bills), Commercial Paper (CP), Certificates of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity.

As the name suggests these funds are highly liquid and Redemption requests in these Liquid funds are processed within one working day.

Who should invest in liquid Mutual funds?

Liquid mutual funds are most suitable for investors who are risk aversive and do not wish to take risks by investing in the stock market and expect a fixed return on investment.

Preferred by investors who park their money for short periods of time typically from 1 day to 3 months.

Experts suggest liquid mutual fund as an ideal parking place when you have a sudden inflow of cash, which could be a maturity of fixed investment, a big bonus, proceed of a real estate sale, or any other source and you are not clear about where to deploy that money.

Investors looking out for opportunities in the equity market and long-term fixed income instruments can also park their money in the liquid funds for time being.

Institutional investors who wish to invest their ideal fund for a very short period and don’t wish to lose return by keeping it ideal.

Many mutual fund investors are using liquid funds to allocate their funds into equity mutual funds using the Systematic Transfer Plan (STP), as they believe this method could yield higher returns.

Also read: What is Gold ETF: How it works and benefits of investing in Liquid Funds

What are the benefits of investing in top liquid funds?

 Liquid fund investments are the least volatile as they are invested in instruments with high credit ratings, hence the least risky.

  • Lower interest rate risk due to very shorter maturity instruments.
  • Liquid funds are generating returns even for 1 day of investments. That’s why corporates are parking their funds on Saturday and make redemption’s on Monday
  • Suitable for putting money aside for emergencies.
  • Liquid fund post-tax returns are better than the returns from the savings account.
  • No exit load levied on the redemption of liquid funds.
  • It’s played a very important role in portfolio diversification for long-term investment goals.
  • The liquidity factor is most attractive for investors in such funds as the redemption payouts are credited to the bank account on the next working day. Some AMCs offer instant redemption facilities in liquid funds.

How to choose the best liquid mutual fund?

Liquid Funds

Fund Returns:

Fund performance plays a significant role in the selection of the best liquid funds. We must seek funds that have delivered consistent returns over different time horizons. Choose the funds that have outperformed their benchmark and peer funds consistently in all market cycles.

One thing to keep in mind the past performance is never indicative of how the fund is going to perform in the future. The past performance can be looked at how funds have performed in the different market cycles.

Track Record:

A track record of the fund house and its fund scheme is an essential criterion while selecting a fund. A fund scheme that has a consistent track record for at least 5 to 10 years is the one you can consider for investment.

Expense ratio:

The expense ratio is one of the most important factors while choosing a good liquid fund. A lower expense ratio interprets a higher take-home return for the investor. Choose a fund with a lower expense ratio.

Portfolio Structure:

The aim of the fund manager of a Liquid Fund is to invest only in liquid instruments with good credit ratings any very low possibility of a default.

Also read: Franklin Templeton Mutual Fund crisis 2020: What does it mean for investors

Taxation of Liquid Funds

Capital gain offered by liquid mutual funds is taxable in the hand of investors. Liquid funds tax rates are the same as applicable to other debt funds. They are added to your overall income and taxed according to your tax slab. There are two types of tax levied on liquid funds:

Debt Mutual Fund Taxation

  Short term Capital Gain Long term Capital Gain
Period Up to 36 Months More Than 36 Months
Tax Rate Income Tax Slab Rate of Investor 20% after indexation

The longer you hold onto your mutual fund units, the more tax-efficient they become as the tax on long-term gains is much lesser than the tax on short-term gains.

Know more about: Mutual Fund Taxation: How it works & Important rules in 2021

Top 5 Liquid mutual funds to invest in India

While selecting the best liquid funds, you need to analyses the fund holistically. Various quantitative and qualitative parameters must be used to arrive at the best liquid funds. The following table shows the top 5 liquid funds in India based on their portfolio structure, track record, and consistent returns in the last 10 years.

Axis Liquid Fund

Fund House

Axis Mutual Fund

Launch Date 01/01/2013
Benchmark CRISIL Liquid Fund Index
AUM 24975 Cr
Fund Manager Mr. Aditya Pagaria Since Aug 2016
Expense ratio 0.18%
Riskometer Low to Moderate
NAV
2280.25 (As of 11/03/2021)

 

Returns in % (REGULAR fund)

6 Months 1 Year 3 Years 5 Years 7 Years 10 Years
1.57 3.86 5.93 6.42 7.06 NA

 

                                        Top Five Holdings

Company (Paper) Instrument Credit Rating % Asset
Reserve Bank of India 91-D 11/03/2021 Treasury Bills Sov 4.07
Reserve Bank of India 91-D 27/05/2021 Treasury Bills Sov 3.18
BPCL 41-D 25/03/2021 Commercial Paper A1+ 3.00
Larsen & Toubro 89-D 10/03/2021 Commercial Paper A1+ 2.60
Reliance Retail Ventures 89-D 05/05/2021 Commercial Paper A1+ 2.59

SBI Liquid Fund

Fund House

SBI Mutual Fund

Launch Date 24/11/2003
Benchmark CRISIL Liquid Fund Index
AUM 42324 Cr
Fund Manager Mr. R Arun Since May 2018
Expense ratio 0.26%
Riskometer Moderate
NAV 3214.77 (As on 11/03/2021)

Returns in % (REGULAR fund)

6 Months 1 Year 3 Years 5 Years 7 Years Since Inc
1.57 3.81 5.84 6.31 6.96 7.28

                                            

                                                         Top Five Holdings

Company (Paper) Instrument Credit Rating % Asset
Reserve Bank of India 91-D 04/03/2021 Treasury Bills SOV 5.41
Hindustan Aeronautics 91-D 15/03/2021 Commercial Paper A1+ 4.59
Reserve Bank of India 91-D 25/03/2021 Treasury Bills SOV 4.59
7.80% GOI 2021 Central Government Loan SOV 4.15
Infina Finance 7-D 05/03/2021 Commercial Paper A1+ 4.02

Nippon India Liquid Fund

Fund House

Nippon India Mutual Fund

Launch Date 09/12/2003
Benchmark CRISIL Liquid Fund Index
AUM 23879 Cr
Fund Manager Mrs. Anju Chhajer
Expense ratio 0.27%
Riskometer Low to Moderate
NAV
 4987.73 (As on 11/03/2021)

Returns in % (REGULAR fund)

6 Months 1 Year 3 Years 5 Years 7 Years Since Inception
1.57 3.90 5.97 6.44 7.08 7.13

 

                                                       Top Five Holdings

Company (Paper) Instrument Credit Rating % Asset
Reserve Bank of India 91-D 18/03/2021 Treasury Bills SOV 6.63
Reserve Bank of India 91-D 25/03/2021 Treasury Bills SOV 5.85
Reserve Bank of India 91-D 15/04/2021 Treasury Bills SOV 4.11
Reserve Bank of India 364-D 13/05/2021 Treasury Bills SOV 4.00
Reliance Industries 84-D 22/03/2021 Commercial Paper A1+ 3.14

ICICI Prudential Liquid Fund

Fund House

ICICI Prudential Mutual Fund

Launch Date 17/11/2005
Benchmark CRISIL Liquid Fund Index
AUM Rs 45457 Cr
Fund Manager Mr. Rahul Goswami Since Sept 2012
Expense ratio 0.32%
Riskometer Moderate
NAV
302.43 As on 11/03/2021

Returns in % (REGULAR fund)

6 Months 1 Year 3 Years 5 Years 7 Years 10 Years
1.52 3.82 5.84 6.31 6.96 7.67

 

                                                           Top Five Holdings

Company (Paper) Instrument Credit Rating % Asset
Reserve Bank of India 364-D 22/04/2021 Treasury Bills SOV 5.86
Reserve Bank of India 364-D 15/04/2021 Treasury Bills SOV 4.43
Reserve Bank of India 91-D 20/05/2021 Treasury Bills SOV 3.93
Reserve Bank of India 91-D 13/05/2021 Treasury Bills SOV 3.91
National Bank Agr. Rur. Devp 91-D 22/04/2021 Commercial Paper A1+ 1.76

HDFC Liquid Fund

Fund House

HDFC Mutual Fund

Launch Date 17/10/2000
Benchmark CRISIL Liquid Fund Index
AUM Rs 59450 Cr
Fund Manager Mr. Anupam Joshi Since 27th Oct 2015

Mr. Sankalp Baid (Since January 22, 2021)

Expense ratio 0.30% (Regular)

0.20% (Direct)

Riskometer Low to Moderate
NAV
4037.32 As on 11/03/2021

Returns in % (REGULAR fund)

6 Months 1 Year 3 Years 5 Years 7 Years 10 Years
1.53 3.75 5.80 6.30 6.97

 

                                                                 Top Five Holdings

Company (Paper) Instrument Credit Rating % Asset
Reserve Bank of India 364-D 13/05/2021 Treasury Bills SOV 9.95
Reserve Bank of India 364-D 20/05/2021 Treasury Bills SOV 9.58
National Bank Agr. Rur. Devp 88-D 25/05/2021 Commercial Paper A1+ 6.68
Reserve Bank of India 364-D 29/04/2021 Treasury Bills SOV 5.41
Reserve Bank of India 364-D 22/04/2021 Treasury Bills SOV 4.63

Conclusion:

The investment objective of liquid funds is to provide reasonable returns and a high level of liquidity by investing in high-quality debt and money market instruments of shorter maturities.

Considering the numerous benefits, individuals should clearly choose liquid funds to put their surplus cash to work rather than relying on savings or current bank accounts.

Please give your comments and share it with others if you found them informative and helpful.

Know more about: Mutual Fund Taxation: How it works & Important rules in 2021

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18 COMMENTS

  1. Author seems to very seasoned and had elaborated in very simple language. Nice insight into Debt Fund … Which is not very popular in India

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