As of December 31, 2025, the Assets Under Management (AUM) of the Indian mutual fund industry has crossed ₹80 lakh crore. It is a substantial growth of almost 3 times in a span of 5 years from ₹31 lakh crore on December 31, 2020. The growth is driven by increasing participation in financial markets as well as the popularity of SIP investments. With so many options to choose from, it becomes difficult to finalise on the liquid mutual fund that suits you the best.
In this guide, we will explore the best liquid mutual funds of 2026 based on industry metrics and performance records.
What are liquid mutual funds?
Liquid mutual funds are a type of debt mutual fund that invests in highly liquid options such as debt and money market instruments with a maturity of up to 91 days. Redemption in these funds is processed within a working day.
Investors looking to invest for short periods, from one day up to 3 months, go for this investment medium. Managers of liquid funds carefully select highly liquid securities with shorter maturity periods and lower chances of default.
Factors to consider before investing in liquid funds
We can use various metrics and standards to analyse the best liquid funds. By understanding what each parameter means, we can make information-backed decisions.
1. Asset under management: AUM is the total market value of assets held by a mutual fund at a given point in time. AUM reflects the size and credibility of the fund. A higher AUM makes the fund more reliable, but it should be used along with other metrics for a broader and better view.
2. Ratios: They help us understand the risks associated with mutual funds and compare one fund to the other. The table below shows the category average returns of liquid mutual funds as of December 31, 2025.
| Period | Standard Deviation | Sharpe Ratio | Sortino Ratio |
| 1 Year | 0.3112 | 1.5427 | 85.3960 |
| 3 Years | 0.3290 | 0.9937 | 10.1744 |
| 5 Years | 0.5391 | -0.0152 | 0.6087 |
| 10 Years | 1.0690 | -1.1685 | 2.2936 |
| 15 Years | 1.1455 | -1.5843 | 1.5112 |
3. Performance: The returns generated by a fund aid in planning the investment. Liquid funds are generally chosen by investors for short-term, and those looking for comparatively safer options. The table below shows the returns of liquid mutual funds over different time periods:
| Tenure | Category average (%) | Top performer (%) | Bottom performer (%) |
| 3 months | 1.24 | 2.89 | -0.03 |
| 6 months | 2.59 | 5.91 | -0.07 |
| 9 months | 4.06 | 10.50 | -0.06 |
| 1 year | 5.83 | 16.08 | -0.09 |
| 2 year | 6.24 | 12.14 | -0.02 |
Top 5 liquid funds
The top 5 liquid funds are selected based on their asset under management as of Jan 15, 2026.
| Fund Name | SBI Liquid Fund – Direct Plan – Growth | HDFC Liquid Fund – Direct Plan – Growth | Aditya Birla Sun Life Liquid Direct Plan Growth | ICICI Prudential Liquid Fund Direct Plan Growth | Axis Liquid Fund Direct Plan Growth Option |
| AUM (₹ cr) | 61,410.99 | 63,736.88 | 55,408.31 | 45,244.37 | 35,653.20 |
| Manager (s) | Rajeev Radhakrishnan | Swapnil Jangam, Dhruv Muchhal, Rohan Pillai | Kaustubh Gupta, Sunaina Cunha, Sanjay Pawar | Darshil Dedhia, Nikhil Kabra | Devang Shah, Aditya Pagaria, Sachin Jain |
| Fund risk | Low | Moderate | Moderate | Low | Moderate |
| Standard deviation | 0.21 | 0.23 | 0.22 | 0.22 | 0.22 |
| Sharpe Ratio | 3.59 | 3.53 | 4.25 | 3.70 | 4.24 |
| Sortino | 49.09 | 56.95 | 91.16 | 1844.33 | |
| Rolling Returns (Jan 25-Dec 25) | 6.53 | 6.59 | 6.66 | 6.58 | 6.66 |
The following are the key takeaways from the best liquid mutual funds of 2026:
- SBI Liquid Fund – Direct Plan – Growth: The SBI Liquid Fund has a low risk profile. It manages ₹61,410.99 crore in assets, indicating its widespread acceptance among investors. The rolling return of 6.53% is slightly lower than peers, though the Sharpe ratio of 3.59 and Sortino ratio of 49.09 reflect reasonable risk-adjusted returns.
- HDFC Liquid Fund – Direct Plan (Growth): With the largest AUM at ₹63,736.88 crore, the HDFC Liquid Fund reflects strong investor confidence and high liquidity. The rolling returns are 6.59%, and the risk profile is moderate. While not the top performer on risk-adjusted measures, the fund offers stability and reliability.
- Aditya Birla Sun Life Liquid Fund – Direct Plan – Growth: This fund has an AUM of ₹55,408.31 crore with a moderate risk profile. It stands out with the highest Sharpe ratio of 4.25 among the group. With a rolling return of 6.66%, the fund demonstrates an effective balance between return generation and risk control, positioning it as one of the strongest performers among the selected funds.
- ICICI Prudential Liquid Fund – Direct Plan – Growth: The fund carries a low risk profile and has an AUM of ₹45,244.37 crore, reflecting steady investor participation. Its rolling return of 6.58% places it broadly in line with other funds. With a Sharpe ratio of 3.70 and a Sortino ratio of 91.16, the fund demonstrates strong risk-adjusted performance.
- Axis Liquid Fund – Direct Plan – Growth Option: Despite having a comparatively lower AUM of ₹35,653.20 crore, the Axis Liquid Fund delivers a rolling return of 6.66%, matching the highest in the peer group. Its Sharpe ratio of 4.24 is among the top, while the exceptionally high Sortino ratio of 1844.33 suggests extremely strong downside protection.
Strengths of the best liquid mutual funds
Based on the latest trends and observed metrics, the following are the strengths of liquid mutual funds:
- Competitive returns: Liquid funds invest mainly in money market instruments and short-term debt securities, so their focus is on capital safety and stability rather than aggressive growth. Within this conservative framework, their returns remain attractive when compared to other low-risk investment options.
- Lower expense ratio: One of the key advantages of liquid funds is their relatively low expense ratio. Compared to equity and longer-duration debt funds, liquid funds require less active management because they are not heavily exposed to market volatility. As a result, a larger portion of the returns is passed on to investors.
- Tax treatment: Liquid mutual funds are categorised under the specified mutual fund category. It means that long-term capital gains are not applicable, while short-term gains are taxed according to the investor’s income tax slab. This makes them especially suitable for short-term parking of surplus funds.
Tax rates by holding period:
| Holding Period | Tax Rate |
| Short-term | As per income tax slab |
| Long-term | Not applicable |
Risks of liquid mutual fund investment
While liquid mutual funds are considered relatively safe, investors should be aware of a few important limitations.
- Lower return potential:
Liquid mutual funds generally offer lower returns compared to equity funds and other market-linked debt funds. Since they prioritise capital preservation and liquidity, their ability to generate higher yields is limited. - Sensitivity to interest rates:
Although liquid funds are less volatile than long-duration debt funds, changes in interest rates can still impact their returns. Sudden rate hikes or cuts may affect yields, especially over very short holding periods.
Bottomline
By investing in instruments with short maturity-periods, liquid funds generate good returns, while keeping the risks under control. This makes them suitable for investors who prefer to protect their capital instead of chasing high returns. By exploring the top 5 liquid funds of 2026, investors can finalise on their investment decision. Combining these funds with other instruments like equity shares, flexi-cap funds, and digital assets, one can construct a portfolio with optimum diversification.
FAQs
Liquid funds are a type of debt mutual fund that invests money in highly liquid assets, such as debt and money market instruments, with a maturity of up to 91 days. The liquid funds can be redeemed within one business day.
Liquid funds invest in very short-term instruments and focus on safety and liquidity, while debt funds may invest for longer durations and carry a higher interest rate risk and credit risk.
Money market securities are financial instruments issued by the government and institutions for their short-term needs. They are highly liquid and carry lower risks. Treasury bills, Commercial Papers, and Certificates of Deposits are some of the money market securities.
Gilt funds are a form of debt mutual funds that primarily invest in government securities (G-secs) from the state and central governments. As these securities are backed by the government, they are considered low-risk. Still, gilt funds are sensitive to interest rate fluctuations, and any changes can affect their returns.
No investment is absolutely risk-free. Liquid funds are a comparatively safer option, but they are still vulnerable to credit and interest rate risks.
