Bank savings barely earn any interest, leaving people wishing for a more efficient, flexible way to grow their funds without locking them for a long time. Liquid funds can help with that. In fact, as of April 2025, the liquid fund segment saw a net inflow of ₹1,18,656 crore. A clear indication of growing investor interest. But how safe are liquid funds, and do the returns justify the risks? Let’s discuss in detail.
What are liquid funds?
Liquid funds are a category of open-ended debt mutual funds that invest in short-term, high-quality money market instruments like treasury bills, commercial papers, government securities, and certificates of deposit, all maturing within 91 days. The key features of liquid funds involve:
- High liquidity: Redemption is usually processed within 24 hours, making them ideal for emergencies.
- Low risk: Short maturity and investment in high-rated instruments minimise interest rate and credit risk.
- No lock-in period: Investors can withdraw money anytime without penalties.
- Competitive returns: Typically higher than savings accounts, ranging between 7%-7.3 depending on market conditions.
- Low cost: Expense ratios are usually low and there are no exit load charges.
- Flexible investment: Suitable for both individuals and businesses for parking surplus funds or building emergency funds.
- Tax efficiency: Gains qualify for long-term capital gains tax with indexation if held for over three years
Also read: What are opportunity funds and how to profit from them?
How safe are liquid funds?
Liquid funds are often viewed as one of the safer mutual fund options, but like all investments, they carry specific risks:
These funds invest in short-dated debt (up to 91 days), so NAVs may still dip if interest rates rise, though the impact is minimal compared to long-term funds.
Despite focusing on high-quality instruments, there’s always a chance of issuer default. An example of this is Taurus Liquid Fund, which plunged nearly 7 % in a single day after a credit downgrade.
In stressed markets, funds can face challenges meeting redemption requests, often needing to sell assets at low prices, which may result in losses. When many people pull out money at once, it can make the problem even worse.
This risk became apparent in March 2025, when liquid funds experienced substantial outflows of over ₹1.33 lakh crore, largely due to year-end tax obligations and corporate withdrawals.
When securities mature, they must be reinvested at current rates, which may be lower, especially in declining interest rate environments.
- Operational and expense risk
Expense ratios and exit loads (if redeemed too soon) can reduce net returns. Additionally, operational errors (e.g., NAV misvaluation), compliance lapses, and unexpected fee hikes further erode your gains.
Despite specific risks, liquid funds prioritise capital preservation and high liquidity, offering stability. Unlike equity funds, which saw Sensex climb 8% but Nifty faced daily swings in H1 2025, liquid funds provide consistent 7% annual returns with minimal NAV volatility.
Check out an interesting read: Beyond the safety net: Understanding the risks of fixed deposits
Recent performance trends
Now that you’ve got the answer to your question: Are liquid funds safe? Let’s review their recent performance to get an idea of their average returns as of June 26th 2025:
| Period | Average Return (%) |
| 1 day | 0.01 |
| 1 week | 0.10 |
| 1 month | 0.49 |
| 3 months | 1.64 |
| 1 year | 6.92 |
Key factors to evaluate before investing
To get the best out of your liquid funds investment, take a moment to consider these key factors:
- Liquid funds generally provide high liquidity, with redemption proceeds typically available within one working day (T+1), as per AMFI guidelines.
- These funds invest in debt and money market securities with maturities of up to 91 days, aiming to reduce interest rate and credit risk.
- Portfolio quality can be assessed by reviewing the credit ratings of underlying securities, which are usually of high quality.
- Expense ratios and any applicable exit loads are disclosed in the scheme information document and may impact net returns.
- Regulatory frameworks by SEBI and oversight by AMFI are in place to promote transparency and investor protection in liquid fund operations.
Regulatory and structural updates
Here are the recent regulatory changes affecting liquid funds and the broader mutual fund industry in 2025:
- Revised cut-off timings for redemptions
SEBI revised cut-off timings for redemption in overnight and liquid mutual fund schemes effective June 1, 2025. Offline (physical) redemption requests must be submitted by 3:00 PM to get the previous business day’s NAV; requests after 3:00 PM get the next business day’s NAV. Online redemption requests for overnight schemes can be submitted up to 7:00 PM to get the same-day NAV. After 7:00 PM requests get the next business day’s NAV.
- SEBI permits IAs, RAs to use liquid funds as a lien for advisors
SEBI has allowed Investment Advisors (IAs) and Research Analysts ( RAs) to use liquid mutual funds and overnight funds, in addition to bank fixed deposits, to meet their regulatory deposit requirements. The deposit must be lien-marked in favour of the Administration and Supervisory Body (ASB).
Read more: Sensex, Nifty 50 Fall Over 1%: Market Decline Explained
Conclusion
Liquid funds offer a smart balance of liquidity, returns but they aren’t completely risk-free. Pick high-quality funds and stay updated on regulations to confidently invest your surplus funds. Assess your goals, stay informed because when it comes to your money, safety and strategy should always go hand in hand.
FAQs
Liquid funds are treated as debt funds and hence their gains are taxed like short-term or long-term capital gains based on holding period and slab rate. For investments made on or after April 1, 2023, all gains regardless of holding period are taxed according to your income slab, with no indexation benefit. Additionally, under Budget 2025, if your total income (including fund gains) is up to ₹12 lakh, you may be eligible for a rebate under Section 87A, making gains effectively tax‑free .
Overnight funds, also SEBI-regulated, offer similar short-term exposure with maturities of less than one day and high liquidity. Another good alternative is bank fixed deposits from highly rated institutions, which provide guaranteed returns along with DICGC insurance up to ₹5 lakh. SEBI categorises overnight and liquid funds separately, giving investors flexibility to deploy surplus cash. Both options are considered low-risk and suitable for meeting short-term financial goals with quick access to funds.
Yes. Systematic Investment Plans (SIPs) are allowed in liquid funds and work like SIPs in other mutual fund categories. According to AMFI guidelines, you can start SIPs with amounts as low as ₹500 per month, which are debited automatically and allotted at the applicable NAV if credited before the cut-off time. This enables disciplined, regular investing in liquid funds, making it easier to build short-term savings without needing a large lump sum.
Yes, investors can redeem their entire holding in a liquid fund at any time. SEBI mandates that liquid fund redemptions settle on a T+1 business day basis. According to SEBI’s updated cut-off rules, requests received by 3 PM get the same day’s NAV, while those received after 3 PM get the next business day’s NAV. Redemption proceeds are typically credited to the investor’s bank account within one working day, ensuring quick access to funds.
Liquid funds do not have a mandatory lock-in period. They are designed to offer high liquidity, allowing investors to redeem their units typically within one business day (T+1). While there is no statutory lock-in, some liquid fund schemes might impose a minimal exit load if redeemed within a very short initial duration (e.g., 7 days) to discourage extremely transient investments. This is a scheme-specific feature, not a universal lock-in.
