Liquid Mutual Funds: Meaning, Benefits & How to Invest in India

In India, investors think of fixed deposits (FDs) or savings when it comes to managing short-term money. In the past 10 years, however, liquid mutual funds have become a preferred parking of excess cash. They have the flexibility of being a crucial component of modern financial planning because of their competitive returns and high liquidity.

This in-depth piece will discuss the meaning of liquid funds and how they function, the pros of liquid funds and how they fit into the debt mutual funds India. We will help readers make a clear comparison of liquid funds vs FD and get a complete understanding of liquid funds taxation. We will also help our readers make the decision to liquidate mutual funds and how to invest in them in India.

Liquid Mutual Funds

Liquid mutual funds are one of the types of debt mutual funds India that buy very short-term money market assets. These assets usually have a maturity of up to 91 days. The money you lend out to quality borrowers for small periods of time makes Liquid Funds low risk and very fluid.

Liquid Mutual Funds Allocations

Mutual Liquid funds are allocated to:

• T-Bills
• CPs
• CDs
• Call Money.

These are short-term finance instruments issued by very credible institutions, making these funds around zero-risk.

 

 

Mutual Liquid Funds Function

While trying to earn some small interest to preserve your capital, Liquid Mutual Funds perform above Savings. With very short periods of maturity for the investments, interest rate risk is very low.

The main things are:

1. Short maturity → lower risk for interest rates.
2. Top-tier investments → low risk of default.
3. Daily NAV calculation → transparency.
4. Simple withdrawal → money is there when you need it.

This makes Liquid Mutual Funds optimal for short-term investments or for when you need to keep your funds on hold.

What Are The Benefits Of Liquid Fund Investments

Benefit 1: Having Cash Available

A major benefit of having liquid fund investments is having cash available. Liquid mutual funds offer same-day or next-day cash withdrawals. This liquidity is suitable for emergencies or short-term needs.

Benefit 2: Low Risk

Of all the mutual funds, liquid funds are the safest because:

• Investments are short-term.
• Exposure to more volatile funds is limited.
• NAV is more stable.

They still aren’t free of risk, though. The risk involved is still much more of a concern than an investor should have compared to funds for equities or longer-term debt.

Benefit 3: More Profitable Than A Traditional Savings Account

When considering a liquid mutual fund, it is important to note that it is a more profitable option than a regular savings account and, at times, is more profitable than a short-term fixed deposit as well, especially when interest rates are on the upside.

Benefit 4: No Lock-In

There is no fixed lock-in period as there is with a fixed deposit, when it comes to liquid funds. You are free to redeem your money whenever you like, as long as it is not subject to an exit load for a short period of time.

Benefit 5: Best Place to Park Surplus Cash

If you get a bonus, sell a property, or are waiting for an appropriate investment, liquid mutual funds are great for temporarily parking your surplus cash without letting it lie idle.

Liquid Mutual Funds and Debt Mutual Funds in India

In the world of debt mutual funds India, liquid funds are at the lowest risk end of the spectrum. Here’s how it stacks up:

• Liquid Funds– Very short term, least risk
• Ultra Short Duration Funds– A bit higher duration and risk
• Short Duration Funds– Moderate risk and return
• Corporate Bond Funds / Gilt Funds – High duration and interest risk

Liquid mutual funds aim for principal protection and liquidity, not aggressive returns.

Liquid Funds vs FD: A Clear-Cut Comparison

One of the most common questions posed by investors is liquid funds vs FD – which of the two is better? The answer is based on your requirements.

Liquidity-

FD: Early withdrawal comes with penalty fees.

Liquid Funds: Quick and easy redemption with no major penalties.

Returns-

FD: Predictable and fixed.

Liquid Funds: Generally stable with market fluctuations.

Taxation-

FD: Taxed based on the income slab.

Liquid Funds: With capital gains taxation, there can be more efficient tax benefits.

Flexibility-

FD: Fixed duration.

Liquid Funds: No fixed duration, meaning you can invest and withdraw whenever you like. Liquid mutual funds are more efficient for investors in the higher tax bracket compared to FDs.

 

 

Liquid Fund Taxation in India

Before investing, it is of great importance to understand liquid fund taxation.

How Are Liquid Mutual Funds Taxed?

For taxation purposes, liquid mutual funds are classified as debt mutual funds.

Short-Term Capital Gains (STCG):

If you sell the units within 36 months, the gains will be included in your income and will be taxed based on your income tax slab.

Long-Term Capital Gains (LTCG):

If the unit is held for more than 36 months, the gains are subject to 20% tax with indexation benefit.

Why Liquid Fund Taxation Can Be Efficient

Unlike FD interest, taxation is deferred instead of being taxed annually, making them attractive for short-term investors who are seeking better post-tax returns.

Who Should Invest in Liquid Mutual Funds?

Liquid mutual funds work best for:

• Emergency funds of salaried professionals.
• Cash flow management for business owners.
• Asset allocation for equity investors.
• Stability and liquidity for retirees.
• First time investing in mutual funds.

Liquid funds work best for an investment horizon of a few days to a few months.

How to Invest in Liquid Mutual Funds in India

Step-by-Step Process

1. Select a Mutual Fund Platform

Mutual fund app, AMC website or registered distributor.

2. Finish KYC Process

Mandatory complete PAN, Aadhaar and bank.

3. Choose the Liquid Fund

Consider the cost, portfolio and the fund house's reputation.

4. Deposit the Funds

You can invest as a lump sum; SIPs can also be structured for liquid funds.

5. Track and Redeem When Required

Monitor the NAV, and redeem anytime needed.

Things to Check Before Investing

Things to check before investing in any liquid mutual fund include:

• Portfolio credit quality.
• Expense ratio.
• Fund house history.
• Structures for exit load.
• Consistency and size of AUM.
• All of these work to mitigate risk further.
  
  

Risks Associated with Liquid Mutual Funds

Even though liquid mutual funds are low-risk, they are not completely risk-free.

• Credit Risk: This is rare, but could happen if there is an issuer default.
• Liquidity Risk: In times of extreme market conditions, there can be delays in the redemption of certain assets.
• Return Fluctuation: There are no guarantees in returns. To mitigate this risk, the selection of funds should be in high-quality portfolios.

Liquid Mutual Funds and Emergency Funds

It's common to advise the use of liquid mutual funds to keep emergency funds as opposed to a regular savings account. This allows for:

• The money is always readily available.
• Funds are always earning interest as opposed to just sitting there.
• There are no long-term investments.
• It is however also important to keep a small amount in your savings account to cover any immediate needs and keep the rest in liquid funds.

 

 

Final Thoughts: Are Liquid Mutual Fund Benefits Worth It?

Liquid mutual funds are a very important investment vehicle for Indian investors. They blend safety, flexibility and economic efficiency for short-term goals and effective cash-flow management. In a well-constructed comparison of liquid funds vs FD, liquid funds are often the better option, particularly in terms of taxation and liquidity.

Once you comprehend the liquid fund meaning, assess the liquid fund benefits, and are clear in your mind about liquid fund taxation, you can certainly use them as an important component of your financial planning. If you're searching for a place to park your money safely and also keep liquidity for future investments, then most definitely consider liquid mutual funds.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.