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

What are Liquid Funds?

In the fast-paced world of finance, liquidity is king. For investors looking for short-term parking of funds with minimal risk, liquid mutual funds have emerged as a smart choice. They combine the safety of debt instruments with the flexibility of quick withdrawals, making them a preferred option for both individuals and corporates.

At Ultra, where we bring multiple investment opportunities to your fingertips, we believe understanding what liquid funds are and how they work is essential for making informed financial decisions. Let’s dive into the details.

Liquid funds are a type of debt mutual fund that invests primarily in money market instruments such as treasury bills, commercial papers, and certificates of deposit. They have a maturity period of up to 91 days, making them less sensitive to interest rate fluctuations.

Key features:

• High Liquidity — Withdrawals are usually processed within 1 working day.

• Low Risk — Invest in high-credit-quality debt securities.

• Short Tenure — Ideal for parking surplus funds for a few days to months.

Liquid Funds Meaning in Simple Terms

Think of liquid funds as a smarter alternative to keeping excess cash in a savings account. Your money works harder, generating better returns than a savings account, while still being accessible quickly.

Benefits of Investing in Liquid Funds

1. Better Returns than Savings Accounts

Average liquid fund returns in India range from 4% to 6% annually, higher than most savings bank rates.

2. High Safety

Investments are made in top-rated short-term debt instruments.

3. Instant Liquidity

Most funds offer quick redemption options, sometimes even within 24 hours.

4. No Lock-in Period

Unlike fixed deposits (FDs), you can withdraw funds anytime without a penalty.

5. Tax Efficiency

Depending on your holding period, taxation may be lower than bank deposit interest.

Best Liquid Funds in India (2025)

Here’s a list of top-performing liquid mutual funds based on recent returns, credit quality, and consistency:

(Returns are indicative and subject to market conditions.)

1. Nippon India Liquid Fund

• 1-Year Return: ~6.5%

• Known for strong credit quality and quick redemption features.

2. ICICI Prudential Liquid Fund

1-Year Return: ~6.4%

Large fund size with diversified short-term debt holdings.

3. Aditya Birla Sun Life Liquid Fund

1-Year Return: ~6.3%

Consistent performance and low volatility.

4. Axis Liquid Fund

1-Year Return: ~6.2%

Offers instant redemption for small amounts.

5. HDFC Liquid Fund

1-Year Return: ~6.2%

Reliable fund house with a track record of stability.

How to Invest in Liquid Funds

• Select a Fund — Compare returns, expense ratio, and fund size.

• Choose an Investment Mode — Lump sum or SIP.

• Complete KYC — Mandatory for mutual fund investments in India.

• Invest Online via Ultra — Our platform makes it seamless to invest and monitor.

• Redeem Anytime — Funds are typically credited within 24 hours.

Tax on Liquid Funds

Returns from Liquid Funds

While returns are not guaranteed, historical data shows that liquid funds have delivered annualized returns of 4–6% over the last few years. They are less volatile than equity funds but still subject to minimal market risk.

Liquid funds are taxed based on capital gains:

• Short-Term Capital Gains (STCG) — If held for less than 3 years, gains are taxed as per your income tax slab.

• Long-Term Capital Gains (LTCG) — If held for 3 years or more, gains are taxed at 20% with indexation benefits.

Who Should Invest in Liquid Funds?

• Individuals parking surplus cash for a short period.

• Businesses looking to manage idle funds effectively.

• Investors needing quick access to funds without sacrificing returns.

Ultra’s Perspective on Liquid Funds

At Ultra, we see liquid funds as a strategic tool in a diversified portfolio. They help investors manage short-term liquidity needs while earning better returns than a savings account. For those who prioritize safety and flexibility, liquid funds are a worthy consideration.

FAQs on Liquid Funds

Q1. Are liquid funds safe?

Yes, they invest in high-quality short-term debt instruments, but they are not risk-free.

Q2. Can I lose money in liquid funds?

While rare, market fluctuations and credit events can impact returns.

Q3. Which is better — liquid funds or FD?

For short-term liquidity, liquid funds often have an edge; for guaranteed returns, FDs are safer.

Q4. What is the minimum investment in liquid funds?

Varies by fund, usually as low as ₹500–₹1,000.

Q5. How quickly can I withdraw from a liquid fund?

Most funds process withdrawals within 24 hours; some offer instant redemption.