What are Liquid Funds? How to Choose a Liquid Fund? List of Best 5 Liquid Funds to Invest in 2021

What are Liquid Funds? How to Choose a Liquid Fund? List of Best 5 Liquid Funds to Invest in 2021 post thumbnail image

Liquid mutual funds are one of the many debt funds. One needs a clear understanding of their investment horizon since they are based on duration. From overnight to long-duration funds of 7 years, debt funds have been classified into 16 different categories. This step by SEBI is to help investors find the right type of fund without being overwhelmed by the choices. Now let us explore what Liquid Mutual Funds are and talk about everything you need to know about them before investing.

What are Liquid Funds?

A Liquid Fund is a debt fund investing in fixed instruments like commercial paper, government securities, treasury bills, etc., with a maturity timeline of up to 91 days. The net asset value of a liquid fund is calculated for 365 days. Investors can withdraw from the process within 24 hours. These funds carry the lowest interest-rate risk in the debt funds category.

Liquid funds are a class of debt funds that invest in short-term fixed income funds market instruments. Treasury bills and commercial securities, for example, are the underlying securities in a liquid fund’s portfolio. The main objective of liquid funds is to provide investors with a high level of liquidity and security.

How do Liquid Funds work?

The sole objective of a liquid fund is to provide capital protection and liquidity to the investors. The fund manager opts for high-quality debt securities and invests according to the scheme’s requirements. Additionally, they ensure that the portfolio’s average maturity is not more than 91 days. When matching the maturity of individual securities with the portfolio’s maturity, the fund manager tries to deliver better return rates. Liquid funds are known to offer a better outcome than a regular savings account.

Assign a proportion to the fund managers “investment objectives. The fund manager must ensure the average duration of the portfolio is at least three months. That is why the fund manager should invest in high-yield debt that matures in 91 days. 

This reduces the sensitivity of funds to interest rate movements, making liquid assets less vulnerable. In addition, the maturity of the underlying securities is adjusted to the maturity of the portfolio. This contributes to higher returns. The value of the fund is not subject to large fluctuations. 

Liquid funds are an excellent option to park your unused money. They are low-risk havens that offer higher returns than regular savings and bank accounts. Liquid funds try to mimic the liquidity aspect of savings and bank accounts. 

These funds are not blocked for a certain period of time. You can use liquid funds instead of regular savings accounts to achieve a higher return.

Things to consider as an investor:


Liquid funds are the least risky classes of debt funds. The NAV doesn’t fluctuate too often as the assets have a maturity period of 60 to 91 days. Help the NAV of liquid funds from getting impacted by the underlying asset price fluctuations. In simple words, they are not entirely risk-free but safer than most of the other mutual funds.

Expected Returns

Previously, liquid funds have provided returns in the range of 7% to 9%, which is way higher than the regular savings bank account. Even though the returns are not guaranteed, they have delivered positive returns on redemption more often than not.


Like all mutual funds, Liquid funds levy a fee to manage investments, called the ‘expense ratio.’ SEBI has announced the expense ratio to be lower than 2.25%. Considering the fund manager’s hold till maturity strategy, liquid funds get a lower expense ratio with higher returns over a short period.

Investment Horizon

Liquid funds are especially for investing the surplus cash for a short duration, up to three months. Such a short horizon helps to realize the full potential of the underlying securities. If you have a longer investment term of up to one year, you may consider investing in ultra-short-term funds to get relatively higher returns.

Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. Since there is no lock-in period, it helps you pull out your money quickly in case of emergencies.


Simply put, liquidity is not entirely risk-free. Risk in investment funds is related to fluctuations in net asset value (NAV). For cash and cash equivalents, NAV does not fluctuate because underlying assets mature within 60 or 91 days, which prevents NAV from being influenced by fluctuations in underlying asset prices. However, the value of the fund may fall due to a sudden downgrade of the credit rating of the underlying securities.

Top Five Liquid Funds

IDBI Liquid Fund Growth

This fund has given 6% annualized returns in the past three years. It is one of the most remarkable mutual funds with minimum lump sum investment required to invest as Rs5000 and SIP as Rs500.

ICICI Prudential Liquid Fund

This fund has continuously hit the benchmark in the Debt segment with a 3.29% return last year and a 5.5% annualized return over the previous three years. The minimum Lump sum investment required in this is Rs100 and Rs100 for SIP Investment.

Mahindra Manulife Liquid Fund Growth

This fund has hit 5.56% annualized returns in the past three years and has consistently outperformed similar funds. The minimum Lump sum investment required in this is Rs1,000 and Rs500 for SIP Investment.

Aditya Birla Sun Life Liquid Fund Growth

With a return of 3.3% last year and an annualized return of 5.51% in the previous three years, this fund has performed exceptionally well in the Debt segment. The minimum Lump sum investment required in this is Rs500 and Rs1,000 for SIP Investment.

Axis Liquid Fund Direct-Growth

This fund has outperformed the returns in the Debt Segment in India. With a 3.27% return last year and a 5.46% annualized return during the previous three years. The minimum Lump sum investment required in this is Rs500 and Rs500 for SIP Investment.

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