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Navigating liquid mutual funds: A comprehensive guide 

Finding the right investment option can be challenging. But what if we told you that there’s a way in which you can use the excess funds you have on hand to make an easy investment and reap regular profits? Well, that’s where liquid mutual funds come in. Using them, you can easily park your surplus funds for a few weeks or months in these money market mutual fund schemes for a much higher yield than your average savings account interest rates. 

The real question is which liquid debt funds are actually good for you? How should you choose the right one? Fret not, for we are here to answer all of those questions. 

Keep reading to understand what parameters you need to look out for when choosing a liquid fund for your investments. 

What is liquid mutual fund?

A liquid mutual fund is a type of debt fund that helps you invest in fixed-income instruments like government securities, commercial paper, treasury bills, and more. These market instruments mature within 91 days. Their NAV is calculated for 365 days.  

Since they offer higher returns than what your savings account can, they are great investment options for medium risk-taking investors. However, the rates shall always be lower than debt funds that invest for longer maturity periods but higher than overnight funds. 

Benefits of investing in liquid mutual funds 

Before investing, it’s best to know what you are getting into. So, let’s take a quick glance at what a liquid fund investment can do for you:

  1. Low risk 

A liquid fund is a low-risk debt fund that prioritizes safeguarding the principal amount while aiming to deliver consistent returns. With a lower maturity period, it becomes easier for fund managers to estimate and mitigate the effects of market volatility to some extent. 

On the other hand, if you invest in funds that hold securities with longer maturities, you may experience fluctuations, ranging from significant capital gains during periods of declining interest rates to substantial capital losses when rates are on the rise.

  1. Low cost

As an investor, you’ll find that liquid funds are budget-friendly debt options, primarily because they’re not as hands-on in management compared to other debt funds. In reality, most liquid funds operate with expense ratios below 1%, which directly benefits you by maximizing your effective liquid fund returns.

  1. Adjustable holding period

As an investor in a liquid fund, you have the freedom to hold your investment for as long as you require. While there may be a small exit load for redeeming within seven days, liquid funds offer flexible holding periods. This means you can easily enter and exit your investment, all while earning secure, market-related returns throughout your investment duration.

Important considerations before investing in liquid funds 

Let’s look at some ways in which you can learn how to invest in liquid funds effectively. 

  1. Risks

The market instruments that liquid funds invest in mature within 91 days. This allows you to have a comparatively smooth sailing experience as opposed to other fund investments without experiencing the harsh winds of volatility. 

 However, it’s important to keep in mind that if the credit rating of any underlying security decreases, the NAV can also experience a decline. This means that liquid funds carry risks and aren’t entirely risk-free.

  1. Returns

As an investor in liquid funds, focus on assessing one-month or three-month returns to gauge fund performance since the underlying assets mature in 91 days.

A well-performing liquid fund should surpass both its benchmark and peer funds consistently. You can verify this by examining one/three-month returns over recent years. Liquid funds typically offer average returns of around 7-9%, outperforming the 4% returns from savings account deposits.

  1. Expense ratio

Like other funds, you would need to pay a fee for profiting from these funds. Most liquid debt funds have a low expense ratio since fund managers keep a large portion of fund holdings until maturity. 

Best liquid mutual funds to invest in 2024

Here are some of the top-performing liquid funds that you should be investing in to gain the most returns:

Fund NameRisk1Y Returns Fund Size (in Cr.)
Mahindra Manulife Liquid FundLow to Medium7.3%₹1,125
Baroda BNP Paribas Liquid Direct Fund Low to Medium7.3%₹8,859
Aditya Birla Sun Life Liquid Fund Medium7.4%₹38,638
Union Liquid FundLow to Medium7.3%₹2,739
Edelweiss Liquid FundMedium7.3%₹5,068

Keep checking the latest news to keep yourself updated regarding liquid mutual funds data. 

Taxation on liquid funds

You do not have to pay taxes on dividend income from liquid funds. However, if you earn capital gains by redeeming the fund units at a price higher than what you bought them for, then you are liable to pay capital gains taxes. They are divided into the following:

  • Short-term capital gains tax: If you decide to sell or redeem liquid fund units within a holding period of up to three years, any profits you earn are classified as short-term capital gains. These gains will be taxed at the income tax slab rate that is applicable to you
  • Long-term capital gains tax: If you hold a liquid fund for more than three years and then decide to redeem or sell it, any profit you make will be treated as a long-term capital gain. In this scenario, you’ll enjoy the advantage of indexation.

    This involves adjusting the purchase price for inflation using a government-provided index. As of now, long-term capital gains are taxed at a rate of 20% with indexation benefits. 


Liquid mutual funds present a compelling low-risk option for investors. While they provide opportunities for higher yields than traditional savings accounts, it’s crucial to understand the associated risks and taxation implications. 

As you navigate the investment landscape, staying informed about market trends and seeking professional guidance can help optimize your investment strategy. For more information on the latest financial happenings, and sound financial advice, visit StockGro today!


What exactly are liquid debt funds?

Liquid debt funds are investment options primarily focused on short-term, safe instruments like government bonds and corporate bonds with shorter maturities. They aim for stability and accessibility while providing modest returns.

How risky are liquid debt funds compared to other investments?

Liquid debt funds are generally considered low-risk compared to stocks or long-term bonds. They invest in short-term, highly-rated debt securities. However, they’re not entirely without risk, though it’s relatively low.

How quickly can I access my money invested in liquid debt funds?

Liquid debt funds are known for their liquidity, meaning you can typically redeem your investment.

What kind of returns can I expect from liquid debt funds?

Liquid debt funds aim for stable, modest returns over the short term, slightly higher than what you’d get from a savings account, ranging between 7% to 9%.

Are there any taxes I should be aware of when investing in liquid debt funds?

Taxes are applicable when you redeem your investment in liquid debt funds, especially on any gains made. The tax rates vary based on the duration of your investment and the type of fund. It’s advisable to seek guidance from a tax advisor for specific details.

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