About Liquid Mutual Funds
- Liquid funds are debt funds that are invested in short-term assets. As per the SEBI regulations, liquid funds are only allowed to invest in money market securities and debt that has maturities of up to 91 days. These assets include government securities, treasury bills, certificates of deposit, repo, or commercial papers.
- The market price of the securities held by the fund determines the return of a liquid fund. The prices of short-term bonds don’t change as much as those of long-term bonds. This makes the returns of the liquid funds to be more stable than other debt funds.
How do Liquid Funds work?
Features of Liquid Mutual Funds
- Returns - Despite the likelihood of being affected by market conditions, liquid funds may offer a higher rate of return upon redemption. Historically, liquid debt funds have generated returns of around 7%-9%, quite higher compared to the returns of a savings account.
- Financial goals - Liquid mutual funds can be considerably helpful when saving up for emergency funds. Besides giving higher returns than saving the capital in bank accounts, the best liquid funds also offer quick and easy liquidity when required.
- Investment horizon - Liquid funds give you increased flexibility when it comes to the holding period/investment horizon. In case you want to set aside your emergency corpus in liquid funds, considering a longer tenure meets the purpose. In case you are considering liquid funds as temporary investments to hold surplus funds till you find the right option to invest your money in, you can consider a shorter horizon as you depending on your need.
- Costs - As with all mutual funds, liquid funds also charge a small fee called an expense ratio to manage your funds. SEBI has mandated the upper limit for the expense ratio to be 1.05%.
Advantages of Investing in Liquid Funds
- Low risk - The best liquid mutual fund is a low-risk debt fund that ensures securing the principal and offering steady returns. This causes the liquid funds’ cycle to be stable across diverse interest rate cycles. On the flip side, funds with longer-holding maturity securities may reap solid profits when rates drop or may end up making losses with the rates rise.
- Low cost - As liquid mutual funds in India are not as actively managed, they are a low-cost debt fund compared to other variants. Most liquid funds even operate at an expense ratio of less than 1%. This low-cost structure offers the investor a promising return on their investment.
- Flexible holding period - The investors of a liquid mutual fund may hold their investments for as long as they want. Though, there is a small exit load that may be charged for redemption within 7 days. However, its flexibility makes it an easy investment option to enter and exit while offering steady returns when holding the investments.
- Quick redemption - Redemption requests are handled promptly, allowing for the request to be processed within one working day. Besides that, some funds even offer a much quicker redemption. This is possible as liquid funds are usually invested in highly liquid securities with a lower default possibility.
- Interest rate risk - Interest rate risk arises as a result of the change in bond prices due to interest rate fluctuations. A high rate of interest results in a drop in bond prices, whereas a low rate of interest leads to high bond prices.
- Inflation risk - Liquid fund returns are generally lower compared to other investment options, such as stocks and bonds, as per their safety and short-term nature. Due to this, the returns may not be able to beat the rate of inflation. This risk further increases with the bond maturity period.
- Credit risk - Liquid funds aren’t insured like traditional savings and fixed deposit accounts. Despite investing in high-quality securities, risk in the market is still inevitable. This may lead to not getting the invested capital when redeeming the funds. When the issuer is not able to pay the principal or the interest on time, then the bond is considered to be in default. The prices of the issuer’s bonds or the NAV of the liquid fund are both likely to diminish if the credit rating or the issuer’s credibility diminishes.
Despite these risks, liquid funds are still considered to be secure financial instruments that offer quick exit and redemption and flexibility.
The factor of risk in any investment is one of the foremost things on people’s minds. The potential risk in mutual funds comes into the picture if there are potential fluctuations in the NAV (net asset value) of the fund. In terms of liquid funds, this doesn’t pose much of a threat as fluctuations may be minimal. Yet, you may want to reflect on some factors before you invest in liquid funds:
- Liquid funds may not be completely free from the bane of risk, but they are relatively less risky than equity-oriented mutual funds. As liquid funds are invested in for short periods, they don’t tend to feel the impact of fluctuations in the markets. Nonetheless, consider the fact that the credit ratings of underlying securities may suddenly drop, and this may pose some risk. All in all, if you are an investor who is seeking minimal risk with relatively low to moderate returns, such funds may be good for you to park your money for a short period.
- You may contemplate investment in liquid funds if you wish to invest some surplus cash in a short-term investment vehicle. You may also consider these funds as they give you liquidity when you want it, and offer better returns for short periods than other investment channels like bank fixed deposits, or even savings accounts.
- In case you wish to invest in a fund with potentially assured returns and low expense ratios, you may think about liquid funds. These funds may suit short-term investors who would not like to take risks with equity.
- It is important to assess your own financial goals and requirements before you invest. Liquid funds may be suited to you if you want short-term gains or wish to create an emergency fund.
Who Should Invest in Liquid Mutual Funds?
- Investment horizon - As the funds invest in securities with short maturity periods, liquid funds are ideal for investors with an investment horizon of up to 3 months. However, investors with a longer investment horizon can opt for a longer duration, such as 6 months or a year.
- Higher returns than a savings account - Individuals who keep their funds in the bank as deposits can benefit from liquid funds through greater flexibility and steady returns. The best-performing liquid funds offer flexible holding periods with easier exit options.
- Contingency funds - Liquid funds are excellent options to set aside your contingency corpus or an emergency fund. This comes with the security of keeping the funds safe as the funds themselves are less risky and volatile. To add to this, you can also redeem them whenever required.
- Temporary investments - The best-performing liquid funds are crafted in a way that helps you park funds while also helping you earn a stable and steady profit. Hence, investors can also opt to park their capital in a liquid fund until they decide how and where to invest the corpus.
When Should You Invest in Liquid Funds?
Investing in liquid funds is ideal for individuals looking to earn better returns on their idle cash over a short period. These funds are a smarter alternative to savings accounts, as they offer higher returns while maintaining liquidity. Liquid funds are especially beneficial for those with financial goals that need to be met within the next 4-5 months. Additionally, if you're looking for a strategic way to enter the equity market, you can use a Systematic Transfer Plan (STP). With STP, you can gradually move your investments from a liquid fund into a Systematic Investment Plan (SIP) in an equity fund. This method not only enhances returns but also helps manage market fluctuations, making it suitable for long-term financial planning.
What Are the Returns on Liquid Funds?
Returns on liquid funds, such as Liquid BeES, are generally moderate when compared to equity or long-term debt funds. These funds primarily invest in short-term debt instruments like treasury bills, commercial papers, and certificates of deposit, with returns closely tied to prevailing interest rates. Liquid BeES, a type of exchange-traded fund (ETF) in India, mirrors the performance of these highly liquid securities. Over the past few years, the average returns from liquid BeES have ranged between 3% and 5%, providing a balance of safety and moderate growth. This makes liquid funds ideal for short-term investments, offering better returns than a regular savings account while maintaining high liquidity.
Tax on Liquid Funds
Investors in liquid funds can earn returns in two forms: capital gains (when selling units at a profit) and dividends (if declared by the fund). Both are taxable under current Indian tax laws.
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Short-Term Capital Gains (STCG) :
- If you redeem liquid fund units at a profit within 24 months of purchase, that gain is categorized as short-term capital gains.
- These gains are added to your total income and taxed at your applicable income tax slab rate.
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Long-Term Capital Gains (LTCG) :
- Starting April 1, 2023, all gains from debt mutual funds, including liquid funds, are treated as short-term capital gains, irrespective of the holding period. These gains are taxed at slab rates.
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Dividends :
- Dividends received from liquid funds are taxed as per your income tax slab rate, under the head “income from other sources.”
- A 10% TDS applies on dividends exceeding ₹5,000 in a financial year.
How to Select the Best Liquid Fund to Invest?
Selecting the right liquid fund involves evaluating several factors to ensure optimal returns and minimal risk.
- Evaluate returns: Examine the fund's performance over short-term periods like one to three months. Since liquid funds invest in short-term debt securities with up to 91 days maturity, choose those that consistently outperform their benchmark and peer funds for more reliable returns.
- Check expense ratio: Liquid funds generally offer stable returns, so comparing expense ratios becomes crucial. The expense ratio is a fee charged annually by the fund, which affects your net returns. Opt for funds with lower expense ratios to maximise your investment.
- Consider fund size: A larger fund with higher Assets Under Management (AUM) is more stable during sudden large redemptions by institutional investors, reducing the risk of liquidity issues that can affect returns.
- Assess portfolio diversification: Ensure the fund's portfolio is diversified across multiple securities and issuers. This helps reduce the impact of any single issuer defaulting, providing a safer investment option.
How to invest in Liquid Funds?
Investing in the liquid Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps: Step 1: : Log in to your Angel One account. Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
step 2: Determine a liquid fund that suits your needs and risk profile. You can learn more about each liquid fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
step 3: Once you finalise the liquid fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 10 Liquid Mutual Funds
| Name | AUM (₹ Crore) | 1Y Returns (%) | 3M Returns (%) | Expense Ratio |
| Franklin India Liquid Fund-Super | 3,927.24 | 6.52 | 1.5 | 0.13 |
| Aditya Birla SL Liquid Fund | 54,614.77 | 6.5 | 1.51 | 0.21 |
| Axis Liquid Fund | 39,027.92 | 6.5 | 1.51 | 0.11 |
| Tata Liquid Fund | 21,437.63 | 6.49 | 1.5 | 0.2 |
| Groww Liquid Fund | 169.14 | 6.49 | 1.49 | 0.1 |
| Canara Rob Liquid Fund | 5,793.54 | 6.48 | 1.49 | 0.07 |
| Edelweiss Liquid Fund | 10,124.95 | 6.48 | 1.5 | 0.1 |
| Nippon India Liquid Fund | 25,993.84 | 6.48 | 1.5 | 0.2 |
| Union Liquid Fund | 7,388.78 | 6.47 | 1.51 | 0.07 |
| PGIM India Liquid Fund | 546.3 | 6.47 | 1.49 | 0.12 |
Note: The data is as of February 2026, with funds ranked by the highest 1-year Returns among Liquid Mutual Fund schemes.
Franklin India Liquid Fund
Franklin India Liquid Fund is an open‑ended liquid scheme that aims to provide current income with high liquidity through investments in debt and money market instruments of up to 91 days’ maturity. It is managed by Pallab Roy and Rohan Maru.
Its benchmark is the NIFTY Liquid Index A‑I. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Aditya Birla Sun Life Liquid Fund
Aditya Birla Sun Life Liquid Fund is an open‑ended liquid scheme that seeks to provide high liquidity and reasonable returns by investing in high‑quality debt and money market instruments. It is managed by Sanjay Pawar, Sunaina da Cunha, and Kaustubh Gupta.
Its benchmark is the NIFTY Liquid Index A‑I. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Axis Liquid Fund
Axis Liquid Fund is an open‑ended liquid scheme designed to offer high liquidity with reasonable returns by investing in money market and short‑term debt securities. It is managed by Devang Shah, Aditya Pagaria, and Sachin Jain.
Its benchmark is the NIFTY Liquid Index A‑I. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Tata Liquid Fund
Tata Liquid Fund is an open‑ended liquid scheme aiming to generate reasonable returns with high liquidity through investments in high‑quality money market and debt instruments. It is managed by Amit Somani and Harsh Dave.
Its benchmark is the CRISIL Liquid Debt A‑I Index. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Groww Liquid Fund
Groww Liquid Fund is an open‑ended liquid scheme that aims to provide high liquidity with returns commensurate with low risk through investments in money market and debt securities of up to 91 days’ maturity. It is managed by Kaustubh Sule.
Its benchmark is the CRISIL Liquid Debt B‑I Index. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Canara Robeco Liquid Fund
Canara Robeco Liquid Fund is an open‑ended liquid scheme seeking enhancement of income while maintaining high liquidity through investments in money market and short‑term debt instruments. It is managed by Kunal Jain and Avnish Jain.
Its benchmark is the CRISIL Liquid Debt A‑I Index. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Edelweiss Liquid Fund
Edelweiss Liquid Fund is an open‑ended liquid scheme that aims to provide reasonable returns with high liquidity through a portfolio of money market and short‑term debt instruments. It is managed by Rahul Dedhia, Pranavi Kulkarni, and Hetul Raval.
Its benchmark is the CRISIL Liquid Debt A‑I Index. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Nippon India Liquid Fund
Nippon India Liquid Fund is an open‑ended liquid scheme that aims to generate optimal returns consistent with moderate risk and high liquidity by investing in debt and money market instruments. It is managed by Pranay Sinha.
Its benchmark is the NIFTY Liquid Index A‑I. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
Union Liquid Fund
Union Liquid Fund is an open‑ended liquid scheme aiming to provide reasonable returns with lower risk and high liquidity through investments in money market and debt instruments of up to 91 days’ maturity. It is managed by Parijat Agrawal and Devesh Thacker.
Its benchmark is the CRISIL Liquid Debt A‑I Index. The scheme levies an exit load of 0.007% on Day 1, reducing to 0.0045% on Day 6, and nil from Day 7 onward.
PGIM India Liquid Fund
PGIM India Liquid Fund is an open‑ended liquid scheme that seeks steady returns with high liquidity by investing in short‑term, high‑quality debt and money market instruments. It is managed by Puneet Pal and Bhupesh Kalyani.
Its benchmark is the CRISIL Liquid Debt A‑I Index. The scheme levies an exit load ranging from 0.007% on Day 1 to 0.0045% on Day 6, and nil from Day 7 onward.
