Liquid Mutual Funds: Short-Term Investments

What are Liquid Mutual Funds?

One kind of debt mutual fund is a liquid mutual fund, which mainly makes investments in short-term money market instruments with maturities as short as ninety-one days.

A liquid fund's main goals are liquidity and capital preservation, not capital growth. Because of this, they are a great substitute for fixed deposits (FDs) or conventional savings accounts, which have a very short holding period.

Key Features of Liquid Mutual Funds

• Short Maturity Period: The maximum maturity of the underlying assets in liquid funds is 91 days, which reduces interest rate risk and guarantees return stability.
• High Liquidity: Units are redeemable at any time, and the funds are credited to the investor's bank account. Some funds even allow up to ₹50,000 to be redeemed instantly each day.
• Low Risk: Among the least hazardous mutual fund categories are liquid funds because of: Short-term Superior debt instruments Absence of exposure to long-term fluctuations in interest rates
• No Exit Load After 7 Days: In order to encourage investors to remain invested for at least a week, SEBI requires a graded exit load structure for the first seven days, after which there is no exit load.
• NAV Calculation: Unlike other mutual funds, liquid funds disclose their Net Asset Value (NAV) on a daily basis, including on holidays.

Benefits of Investing in Liquid Mutual Funds

• Better Returns than Savings Accounts: While bank savings accounts typically offer 3–4% interest, liquid funds have historically delivered returns in the range of 5–7% annually (though not guaranteed).
• High Liquidity for Emergency Use: Liquid funds are ideal for parking emergency funds, allowing easy access without locking your money away like in an FD.
• Low Volatility: Due to their short duration and investment in high-credit-quality instruments, liquid funds are less volatile than other debt or equity funds.
• No Lock-in Period: You can invest and withdraw anytime, unlike FDs or ELSS (Equity Linked Savings Schemes), which come with lock-ins.
• Tax Efficiency: When compared to FDs (especially for those in higher tax brackets), liquid funds may offer better post-tax returns if held long enough or used strategically.

Who Should Invest in Liquid Mutual Funds?

Liquid funds are suitable for:

• Individuals or businesses with idle cash looking for higher returns than savings accounts.
• Investors with short-term goals (less than 3 months)
• Emergency fund holders seeking liquidity and capital safety
• Systematic Transfer Plan (STP) users who want to invest gradually into equity from a safe fund.

Risks Involved in Liquid Mutual Funds

While considered low risk, liquid mutual funds are not risk-free. Potential risks include:

• Credit Risk: If the issuer of the underlying debt instruments defaults, the fund’s value can drop. This risk is minimized in funds that invest in AAA-rated instruments.
• Interest Rate Risk: Although low due to short maturities, if interest rates change abruptly, NAVs can fluctuate slightly.
• Liquidity Risk: If many investors redeem at once or markets become illiquid (e.g., during crises), redemption delays may occur. However, this is rare in liquid funds.

Why Choose Risify to Invest in Liquid Mutual Funds?

• Expert-Curated Recommendations: Risify offers only the best liquid mutual funds, including top performers like UTI Liquid Fund, tailored to your short-term goals.
• Instant Liquidity & Flexibility: Invest in liquid funds that offer quick access to your money—ideal for emergency funds or surplus cash parking.
• Compare & Choose Smartly: Easily compare liquid funds based on performance, risk, and liquid fund interest rates with our intelligent tools.
• Real-Time Tracking: Monitor your liquid mutual fund returns anytime, anywhere, with our user-friendly dashboard.
• Personal Guidance: Get support from a dedicated Risify Relationship Manager to help select good liquid mutual funds confidently.

Start smart with Risify—your trusted platform for secure, seamless liquid fund investment.

Liquid Mutual Funds – Frequently Asked Questions (FAQs)

• Are liquid funds safe?
  Liquid funds are considered relatively safe due to their investment in low-risk, short-term instruments. However, they are not entirely risk-free—there may be minimal credit or interest rate risk.
• How quickly can I withdraw my money from a liquid fund?
  You can usually redeem your money within one working day. Some AMCs offer instant redemption up to a certain limit (e.g., ₹50,000), credited within minutes.
• Who should invest in liquid funds?
  Liquid funds are suitable for:
  Parking idle cash for a few days to a few months
  Emergency funds
  Individuals and businesses needing quick access to funds
  Investors looking for better returns than a savings account
• What is the return expectation from liquid funds?
  Returns typically range between 3% to 6% annually, depending on market interest rates. These are not guaranteed but are generally more stable than equity fund returns.
• Is there any lock-in period?
  No, liquid mutual funds do not have a lock-in period. You can invest and withdraw at any time.
• Are returns from liquid funds taxable?
  Yes. As per tax rules:
  All gains are added to your income and taxed as per your income tax slab.
  There are no longer separate short-term or long-term capital gain benefits (post-April 2023).
• How are liquid funds different from fixed deposits (FDs)?
  Liquidity: Liquid funds allow easy withdrawals without penalties, unlike FDs.
  Returns: Potentially higher returns than FDs, but not guaranteed.
  Taxation: Gains in liquid funds may be more tax-efficient for those in lower tax brackets.
• Is there any risk of losing money in a liquid fund?
  The risk is minimal but not zero. In rare cases, defaults in the underlying instruments or extreme market events can impact returns slightly.
• Can businesses and corporates invest in liquid funds?
  Yes, many businesses use liquid funds to manage short-term cash flow needs due to ease of withdrawal and better yield than bank accounts.