Best Liquid Funds Sorted by Last 3 Year Returns
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?
Mutual funds in the category of liquid funds invest your money in debt instruments of a short-term nature. According to the regulations set forth by the Securities and Exchange Board of India (SEBI), liquid funds can invest capital in debt instruments with maturities reaching 91 days and money market securities only. Such assets comprise treasury bills, government securities, certificates of deposit, commercial papers, or etc.
The primary aim of liquid funds is to work in such a way as to provide you with the liquidity of capital. This is the main idea of short-term debt instruments as the main investments in such funds. The returns of liquid funds are largely dependent on the market value of the various securities that the fund holds. In terms of security in your investments, liquid funds may give your portfolio the stability it needs if you have other high-risk investments.
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.
Risks involved in Liquid Funds
- 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.
Factors to Consider Before Investing in Liquid Funds
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 can earn capital gains and dividends through liquid funds. If the investors earn a profit by redeeming their funds at a higher price than their purchasing price, then their capital gains are taxable.
- Short-term capital gains – If the investor decides to redeem their funds after holding them for about 3 years, they are considered to have earned Short-term Capital Gains (STCG). The gains are taxed as per the income slab tax rate that applies to the investor.
- Long-term capital gains – If the investors redeem the funds after holding them for more than 3 years, they are deemed to have gained Long-term Capital Gains (LTCG). It is currently taxed at a rate of 20% with indexation benefits. Indexation refers to the purchase price being adjusted for inflation before the capital gain is calculated (as per the index provided by the government).
- Dividend taxation – The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition to this, there is a 10% TDS on dividend amount exceeding Rs. 5000 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 5 Liquid Mutual Funds
| Name | Minimum Investment (₹) | AUM (₹ in crore) | CAGR 3Y (%) | CAGR 5Y (%) |
| SBI Liquid Fund | 500 | 57,052.91 | 4.25 | 5.28 |
| HDFC Liquid Fund | 100 | 54,262.71 | 4.23 | 5.25 |
| ICICI Pru Liquid fund | 99 | 47,482.72 | 4.29 | 5.32 |
| Aditya Birla SL Liquid Fund | 500 | 35,226.23 | 4.34 | 5.38 |
| Kotak Liquid Fund | 100 | 33,220.83 | 4.23 | 5.25 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out real-time data on Angel One.
SBI Liquid Fund
The SBI Liquid Fund has an expense ratio of 0.18%, an exit load is 0.007%, and a minimum lump sum of ₹500. The benchmark for the SBI Liquid Fund is Crisil Liquid Fund Index.
The fund is diversified into the following sectors: Public banks (37.97%), G-sec (17.69%), Private banks (8.21%), Specialised finance (7.57%), and Investment banking and brokerage (5.21%). The rest of the 23.35% is distributed in 8 other sectors.
HDFC Liquid Fund
The HDFC Liquid Fund has an expense ratio of 0.20% and a Sharpe ratio of -4.99. Its exit load is 0.007%, a minimum lump sum at ₹100, and its benchmark is Crisil Liquid Fund Index.
The fund is diversified into the following sectors: Public banks (29.65%), G-sec (24.07%), Specialised finance (7.76%), Investment banking and brokerage (4.33%), and Telecom services (4.12%). The rest of the 30.07% is invested in the remaining 15 sectors.
ICICI Pru Liquid Fund
The ICICI Pru Liquid Fund is diversified in the following sectors: Public banks (24.31%), G-Sec (19.22%), specialised finance (11.97%), miscellaneous (6.98%), and home financing (6.31%). The rest of the 31.20% of the sector is divided into 15 other sectors.
The expense ratio for ICICI Pru Liquid Fund is set at 0.20%, its exit load is 0.007%, and a minimum lump sum of ₹99. The fund’s benchmark is Crisil Liquid Index Fund.
Aditya Birla SL Liquid Fund
The expense ratio of the fund is 0.21%, and its Sharpe ratio is -4.09%. The fund has an exit load of 0.007%, a minimum lump sum of ₹500, and its benchmark is Crisil Liquid Fund Index.
Its fund diversification is as follows: G-sec (30.99%), Public banks (27.36%), specialised finance (10.12%), Private banks (9.67%), and Power generation (6.51%). The funds’ rest 15.35% of funds are invested in 16 sectors.
Kotak Liquid Fund
The fund has its benchmark as Nifty Liquid Fund Index. The Kotak Liquid Fund has an expense ratio of 0.15%, with an exit load of 0.007%. Further, the minimum lump sum for the fund is ₹100.
The fund is diversified in the following sectors: public banks (28.29%), G-sec (16.17%), specialised finance (13.86%), miscellaneous (9.56%), and retail-speciality (5.64%). The rest of the 26.47% of the sector is divided into 16 sectors.
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