Best liquid mutual fund to invest in India July2023: Quant, IDBI, Edelweiss, Mahindra Manulife, LIC MF

Selecting a liquid mutual fund from so many seemingly identical schemes can be challenging for a retail investor. In this article, we demystify liquid funds, state their purpose, and list the top-performing liquid funds.

Best liquid mutual funds to invest in 2023

If you are looking for a debt mutual fund that can protect your capital and give you liquidity with low to moderate returns, a liquid mutual fund is the best choice. As of July 2021, Quant Liquid Fund has given the best returns of 4.67% on a one-year basis. In distant second place is IDBI Liquid Fund, with one-year returns of 3.44%. 

The top-rated liquid mutual funds you must invest in India in September 2023: Aditya Birla Sun Life Liquid Fund, giving you 6.92% returns for a year, Canara Robeco Liquid Fund that provides yearly returns of 6.76%, Baroda BNP Paribas Liquid Fund with its one year returns of 6.76%, Bank of India Liquid Fund which gives you 6.76% returns, etc.

Best liquid mutual funds to invest in India

Best liquid mutual funds to invest in India


Liquid mutual funds – FAQs

1) What are liquid mutual funds?

A liquid mutual fund is an open-ended scheme that invests in debt and money market securities with a maturity of up to 91 days only. Some of the instruments that a liquid fund invests in are:

  • Treasury Bills (T-Bills)
  • Commercial Paper (CP)
  • Certificates of Deposit (CD)
  • Collateralised Lending & Borrowing Obligations (CBLO)
  • Debentures
  • Bills Rediscounting

Note: The original maturity of the instrument at the time of issuance can be more than 91 days. However, when the liquid fund invests in it, the residual maturity should only be up to 91 days.

Liquid funds invest in securities that are usually safe. The returns you can expect from these funds are low to moderate. However, while investing in these funds, your objective should be to get quick access (liquidity) to your funds when in need rather than high returns.

SEBI has categorised liquid mutual funds as a sub-category under the broader category of debt mutual funds.

2) Why should an individual invest in liquid funds?

An individual can invest in a liquid mutual for various reasons such as:

  • Building and maintaining an emergency fund
  • Parking any surplus money they may not need for a few weeks to up to a year
  • Parking a lumpsum amount that has to be deployed in an equity fund through a systematic transfer plan (STP)

3) How are liquid funds taxed?

Liquid mutual funds are taxed depending on your holding period.

  • Short-term capital gains (STCG): If the holding period of liquid mutual fund units is up to three years (36 months), the profits are classified as short-term capital gains (STCG). STCG is added to your overall income and taxed as per your income tax slab.
  • Long-term capital gains (LTCG): If the holding period of liquid mutual fund units is more than three years (36 months), the profits are classified as long-term capital gains (LTCG). LTCG is taxed at 20% with indexation benefit.

4) How is a liquid fund better than a bank savings account/fixed deposit for parking emergency fund money?

From the capital gains/interest taxation point of view, liquid mutual funds are more efficient than bank savings accounts and fixed deposits when the holding period is more than three years. The interest earned on a savings bank account or a fixed deposit is added to your overall income and taxed as per your income tax slab. The interest earned on a savings bank account qualifies for deduction up to Rs 10,000 per financial year under Section 80TTA of the Income Tax Act.

If your holding period is more than three years, long-term capital gains from a liquid fund is taxed at 20% after considering the indexation benefit. So, you should park your emergency fund money in a liquid mutual fund rather than a bank savings account or fixed deposit.

5) Is there any lock-in period for investing in liquid funds?

No, usually there is no lock-in period for investing in liquid funds.

6) What is the exit load applicable for liquid funds?

Most AMCs levy a small exit load if you redeem your investments within the first seven days of investment. After seven days, there is usually no exit load for liquid funds. For example, IDBI Liquid Fund has the following exit load structure:

Redemption Exit load
If Redeemed within 1 day 0.0070%
If Redeemed within 2 days 0.0065%
If Redeemed within 3 days 0.0060%
If Redeemed within 4 days 0.0055%
If Redeemed within 5 days 0.0050%
If Redeemed within 6 days 0.0045%

Other AMCs also follow a somewhat similar structure for exit load for liquid funds.

7) What is the instant redemption facility provided by some AMCs for liquid funds?

Some AMCs provide an instant redemption facility to investors for their liquid funds. Under this, the redemption amount is transferred to the investor’s bank account in a few minutes through IMPS. Please note, however, that there are some restrictions regarding the amount that can be redeemed through this facility. 

For example, Axis Mutual Fund provides the insta redemption facility to Axis Liquid Fund investors. Under this, an investor can redeem up to 90% of the current value of available units or a maximum of Rs 50,000 per day (whichever is lower). For Axis Liquid Fund investors, the insta redemption facility is available 24x7.

If an investor wishes to withdraw an amount that exceeds the above limitations, they have to go through the regular redemption process. Regular redemption payments are processed within one working day (T+1) of placing the redemption request.

8) How can liquid funds be used for STP for investing in equity mutual funds?

Sometimes you may have a certain lumpsum amount that you want to invest in equities. But you want to invest the amount in small tranches over a period of time. You can do this by parking the money in a liquid mutual fund and opting for a systematic transfer plan (STP). Under STP, you can give instructions to the AMC to redeem a specified amount/units from the liquid fund scheme and invest it in another scheme (for example, an equity scheme) at regular intervals (say, every month).

For example, let’s assume an investor has a lumpsum amount of Rs 1,20,000. He can invest it in a liquid mutual fund scheme, and then opt for an STP from the liquid scheme to an equity scheme, wherein Rs 10,000 will be redeemed from the liquid scheme every month and invested in the equity scheme through an SIP.

9) What is the process of buying liquid mutual funds?

The process of buying a liquid fund is pretty much the same as the process of buying any other mutual fund. You can invest in a liquid mutual fund scheme by going to the website of the AMC. It is the simplest and easiest way of investing, and can be done from the comfort of your home. 

To invest online, take the following steps:

  1. Register on the AMC website.
  2. The system will check if you are KYC compliant. If you are KYC compliant, the system will proceed further. If not, you will have to complete your KYC before you can proceed. This can be done online through the e-KYC process.
  3. Enter your bank details to debit the lumpsum or SIP amount. The AMC will use the same bank account details for credit of redemption proceeds.
  4. You can now proceed to invest in a specific scheme. Select the scheme name, direct or regular plan, and lumpsum/SIP investment. If you choose SIP, you have to select the amount, frequency (e.g. weekly, monthly), the bank account details for the debit of SIP amount, the debit date, and the period for which SIP will continue.
  5. Filling in the above details and submitting them will complete your investment.

You can log in regularly to your account to monitor the credit of scheme units, the NAV, and check your progress towards your financial goals.

10) Which are the best AMCs to buy liquid mutual funds?

While choosing the best AMC to buy liquid mutual funds, you should consider the following selection criteria:

  • Is the AMC reputable and experienced?
  • How do investors view the AMC, and what is their opinion about it?
  • Are the sponsors and management team of the AMC credible?
  • Does the AMC offer scheme/s that meet your financial planning needs? Does the scheme objective match your needs?
  • Does the AMC have all or most processes digitised, so that you can operate your investment account from anywhere?

Apart from evaluating the AMC, you also need to evaluate the scheme you wish to invest in. While selecting a scheme, you should consider the following parameters:

  • Does the scheme objective match with your investment objective? (This is the most important criterion.)
  • Does the fund manager have the required experience, and how have their earlier schemes performed?
  • How has the scheme performed in terms of returns as compared to the benchmark and other peers?
  • How does the scheme expense ratio compare with that of its peers?
  • How long has the scheme existed? How much AUM (Assets Under Management) has it garnered? What is the opinion of other investors about the scheme?
  • Does the scheme have an exit load? If yes, how much and how is it applicable?
  • How is the scheme ranked by entities like CRISIL, Morning Star, Value Research, etc.?

Based on the above parameters, some of the AMCs to consider for investing in liquid funds include:

  1. ICICI Prudential Mutual Fund that offers ICICI Prudential Liquid Fund
  2. Tata Mutual Fund that offers Tata Liquid Fund
  3. Axis Mutual Fund that offers Axis Liquid Fund
  4. Aditya Birla Sun Life AMC that offers ABSL Liquid Fund
  5. Nippon Indian Mutual Fund that offers Nippon India Liquid Fund


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