What Are Liquid Mutual Funds?
Liquid mutual funds are a special kind of debt mutual fund that invest in very short-term money market instruments like treasury bills, commercial papers, and certificates of deposit, with maturity periods up to 91 days. Their key aim is to provide investors with high liquidity and better returns than a regular savings account, while maintaining low risk.
How Do Liquid Funds Differ From Regular Debt Funds?
| Feature | Liquid Funds | Regular Debt Funds |
|---|---|---|
| Investment Horizon | Very short-term (up to 91 days) | Medium to long term (months to years) |
| Instrument Types | Treasury bills, commercial papers | Bonds, debentures, government securities |
| Risk Level | Very low risk | Low to moderate risk |
| Returns | Moderate returns, better than savings | Generally higher returns, more volatility |
| Liquidity | High liquidity, redemptions within 24 hours | Lower liquidity, redemption may take days |
| Interest Rate Sensitivity | Minimal due to short duration | Higher due to longer duration |
Liquid funds are ideal for parking surplus cash or emergency funds that may be needed at short notice, whereas regular debt funds suit investors with longer time horizons seeking stable income.
Risks of Liquid Funds
Though regarded as safe, liquid funds do have risks:
- Market risk: Though limited due to short maturities, liquid funds are subject to changes in interest rates and credit quality.
- Credit risk: Though they primarily invest in high-quality papers, default risk remains minimal but possible.
- Taxation: Gains from liquid funds held less than 3 years are taxed as per the investor’s income slab, making tax efficiency a consideration.
Benchmark
Most liquid funds in India track or compare against benchmarks like the NIFTY Liquid Index or the CRISIL Liquid Fund Index.
Performance of Popular Liquid Mutual Funds (Last 3 Years)
Here are 3-year annualized returns and fund size for top liquid funds in India as of late 2025:
| Fund Name | 3-Year Return (%) | AUM (₹ Crore) | Expense Ratio (%) |
|---|---|---|---|
| Aditya Birla Sun Life Liquid | ~7.02 | 49,800 | 0.35 |
| HDFC Liquid Fund | ~6.9 | 63,200 | 0.28 |
| Axis Liquid Fund | ~6.9 | 28,000 | 0.24 |
| PGIM India Liquid Fund | ~6.8 | 500 | 0.22 |
| Edelweiss Liquid Fund | ~5.7 | 8,100 | 0.13 |
These funds provide moderate returns with extremely high liquidity and low risk, outperforming most savings bank interest rates over the same period.
Who Should Invest in Liquid Funds?
- Investors needing a safe parking space for surplus cash.
- Those who want quick access to funds without locking money in with a bank fixed deposit.
- Conservative investors seeking better-than-savings account returns with minimal risk.
- Corporates and institutions needing short-term cash management without sacrificing liquidity.
Conclusion
Liquid mutual funds are an excellent investment tool for short-term cash management, offering safety, liquidity, and fair returns superior to traditional savings accounts. They differ substantially from regular debt funds, which cater to longer-term goals and typically take on more risks for higher returns. Investors should incorporate liquid funds in their portfolio for immediate or emergency cash needs, while using regular debt funds for medium to long-term objectives.
Frequently Asked Questions
What is a liquid mutual fund?
A liquid mutual fund is a type of debt fund that invests in short-term money market instruments with a maturity of up to 91 days, aiming to provide high liquidity and better returns than a savings account.
How is a liquid fund different from regular debt funds?
Liquid funds invest in very short-term instruments and offer high liquidity with minimal interest rate risk, whereas regular debt funds invest in medium to long-term securities with higher risk and less liquidity.
What are the risks associated with liquid funds?
Liquid funds carry minimal market and credit risk due to short maturities, but risks like credit rating downgrades and slight NAV fluctuations remain.
What benchmark do liquid funds follow?
Most liquid funds track benchmarks like the NIFTY Liquid Index or the CRISIL Liquid Fund Index to measure performance.
How are liquid funds taxed in India?
As of 2025, all gains from liquid funds are treated as short-term capital gains, taxed at the investor's income tax slab rate, with no indexation benefit for investments made after April 1, 2023.
Can liquid funds be used as emergency funds?
Yes, due to their high liquidity and low risk, liquid funds are ideal for emergency savings and short-term parking of surplus cash.
What returns can investors expect from liquid funds?
Liquid funds typically deliver annualized returns around 6.5% to 7.5%, outperforming regular savings accounts while maintaining safety.
Is there a lock-in period for liquid funds?
No, liquid funds have no lock-in period; investors can redeem their investments anytime, usually within one business day.
How quickly can I redeem my money from a liquid fund?
Most liquid funds offer redemption on a T+1 basis, meaning you get your funds within one working day, with some offering instant redemption up to specified limits.
Are liquid funds completely risk-free?
No investment is completely risk-free. While liquid funds are low risk with high liquidity, they carry minimal market and credit risk unlike fixed deposit insurance-backed savings.
