How To Invest in Liquid Funds in India

Liquid funds are a type of mutual fund that invests in debt and money market instruments with a maturity period of up to 91 days. The primary objective of liquid funds is to provide investors with high liquidity and low-risk investments.

Instruments Under Liquid Funds 

The instruments of liquid funds are short-term money market instruments such as treasury bills (T-bills), commercial papers (CP), certificates of deposit (CD), and Collateralized Lending & Borrowing Obligations (CBLO) with a residual maturity of up to 91 days. 

These instruments are issued by entities such as banks, financial institutions, and corporations to meet their short-term funding requirements.

Let’s understand these instruments in more detail:

  • Treasury Bills: These are short-term debt instruments issued by the Government of India to meet its short-term funding requirements. They are issued for a duration of 91 days, 182 days, or 364 days.
  • Commercial Papers: These are unsecured, short-term debt instruments issued by corporations to meet their working capital requirements. They have a maturity period of up to 1 year.
  • Certificates of Deposit: These are negotiable money market instruments issued by banks and financial institutions to raise short-term funds from the market. They have a maturity period of up to 1 year.
  • Collateralized Lending & Borrowing Obligations (CBLO): CBLO are money market instruments issued by the Clearing Corporation of India Limited (CCIL) that enable lending and borrowing of funds between entities in the money market. CBLOs are highly liquid and have a maturity period of up to 1 year. 

Who Should Invest in Liquid Funds

Liquid funds are ideal for investors who want to park their surplus funds for a short period, typically ranging from 1 day to three months. You can get higher return on investing the liquid funds than the savings or current account. Usually, savings accounts give 2.5% to 4% interest, with the liquid funds you can get a return of 5% to 6%.

Additionally, if you have surplus funds in the form of bonuses, capital gains, gifts, or other incentives, you can invest in liquid funds. Later, you can transfer your investments into equity mutual funds through the Systematic Transfer Plan (STP) to potentially earn higher returns.

Top 10 Liquid Funds Based on Returns

As of April 2023, these are the top 10 liquid funds based on returns. 

Liquid Fund Name3-Year Return (%)5-Year Return (%)
Quant Liquid Direct Fund-Growth4.95%5.88%
Mahindra Manulife Liquid Fund4.47%5.42%
IDBI Liquid Fund4.48%5.41%
Franklin India Liquid Fund Direct-Growth4.28%5.40%
Edelweiss Liquid Direct-Growth4.35%5.39%
Aditya Birla Sun Life Liquid Fund Direct-Growth4.38%5.39%
Nippon India Liquid Fund4.42%5.38%
PGIM India Liquid Fund Direct Plan-Growth4.36%5.37%
Baroda BNP Paribas Liquid Fund4.41%5.37%
Axis Liquid Fund4.39%5.35%
Disclaimer: The liquid funds mentioned in this article are purely on the basis of returns and do not recommend any specific fund. It is recommended that you make your own decision after thorough research and analysis before investing in a liquid fund.

Factors to Consider Before Investing in Liquid Funds

Investing in liquid mutual funds in India can be a wise decision for those looking to park their surplus funds for a short period. 

However, before investing in these funds, there are some factors to consider:

#1. Risk: Although liquid funds are considered low-risk investments, they are not completely risk-free. You should consider the credit quality of the underlying instruments and the reputation of the fund house before investing.

#2. Expense ratio: Expense ratio is the fee charged by fund house for managing the fund. As per the SEBI, the expense ratio must be under 2.25%. You should choose funds with a lower expense ratio to get the higher return in short term investments.

#3. Liquidity: Liquidity is the ease with which one can convert their investment into cash. Liquid funds offer high liquidity, but you should ensure that the fund you are investing in has a good track record of meeting redemption requests promptly.

#4. Credit rating: You should look for funds that invest in high-quality debt instruments with a good credit rating. Funds with a higher credit rating have a lower default risk, which makes them more stable and secure.

#5. Tax implications: You should be aware of the tax implications of investing in liquid funds. While these funds offer higher returns than savings accounts, they are not entirely tax-free. The gains from liquid funds are subject to taxation, and you should choose funds that offer tax-efficient returns.

How to Invest in Liquid Funds

You can invest in liquid funds via online or offline modes. 

#1. Invest in Liquid Funds Through Offline mode

Step #1. You may invest in direct plans of debt funds directly with an AMC (Asset Management Company). You could visit their branch office and fill the application form before the cut off time, 1.30 pm. 

Step #2. Submit the required documents like KYC (Know Your Customer) details including your PAN card, Aadhaar card, and address proof, and bank account details, and a canceled cheque.

Step #3. Once the documents are verified, make the payment by cheque or demand draft.

Step #4. The fund house will allocate units based on the prevailing net asset value (NAV) on the day of receipt of the application form and payment.

#2. Invest in Liquid Funds Through Online Mode

You may invest in direct plans of debt mutual funds online by visiting the website of the AMC or by stock broker.

Step #1. Open a demat account with a stockbroker or a mutual fund investment platform like Zerodha, Groww, or Paytm Money.

Step #2. Complete your eKYC by submitting PAN and Aadhaar details.

Step #3. Once KYC is done, login to the platform and select the liquid fund you want to invest in.

Step #4. Enter the investment amount and confirm the transaction. 

Step #5. Once the payment is confirmed, units will be allotted based on the NAV of the day of investment.

Step #6. You can track your investment on the platform’s portfolio tracker.

How To Invest In Liquid Funds In Zerodha Through Coin

You can invest in liquid funds in zerodha through Coin web or app. 

Here are the steps to follow:

Step #1. Download the Zerodha Coin app from the App Store or Play Store on your smartphone.

Step #2. Login to your Zerodha account by entering your login ID and password.

Step #3. Click on the “Mutual Funds” tab on the dashboard.

Step #4. Select the “Debt>Liquid” option from the list of categories.

Invest in liquid funds through zerodha coin

Step #5. Browse through the list of available liquid funds and choose the one you want to invest in.

choose liquid funds

Step #6. Click on “Buy” for lumpsum investment and “SIP” for SIP investments.

Step #7. Enter the amount you want to invest in the fund and click on the “Buy” button for lumpsum investment. For start investing in SIP, enter/select:

  • Frequency of investment.
  • Installment amount.
  • Automatic set-up (optional).

Step #8. Click on “Invest” to confirm the purchases.  

Step #9. Once the purchase is confirmed, your order is placed. You can view your order by selecting the “investment” option. 

Step #10. Within 1-2 days, the NAV will be allocated, and you can check it in your portfolio.

You may like to read how to invest in liquid funds through Groww app.

Taxation of Debt Mutual Funds After 1 April 2023

Earlier, the tax implications of investing in liquid funds depend on the holding period of the investment.

Short-term capital gains tax –  STCG is applicable on investments held for less than three years. The tax rate for short-term capital gains is calculated as per the investor’s income tax slab rate. 

Long-term capital gains tax –  LTCG is applicable on investments held for more than three years (36 months). The tax rate for long-term capital gains is 20% with indexation benefit. Indexation is a process of adjusting the cost of acquisition for inflation, which helps in reducing the tax liability.

As per the Budget 2023, debt mutual funds will no longer enjoy the benefit of long-term capital gains (LTCG) from April 1st, 2023. Thus, the capital gains earned from investments in debt funds will now be taxed based on the investor’s applicable income tax slab rate. 

Debt funds are a type of mutual fund that invests a major portion of their portfolio in debt instruments, with a debt exposure of more than 65%, while the equity exposure is less than 35%.

Effective from April 1st, 2023, debt funds will not receive indexation benefit, and gains from debt funds will be treated as short-term capital gains. Therefore, these gains will be added to your taxable income and taxed at your applicable slab rate.

How To Withdraw Money From Liquid Funds 

Liquid funds offer high liquidity, which means you can redeem your investment on a T+1 basis, where T represents the day of the transaction.

You can redeem your investment in a liquid fund by submitting a redemption request to the fund house or the asset management company (AMC) before the cut-off time on a business day. The cut-off time varies depending on the AMC, but it is usually around 3 PM.

The redemption amount will be credited to your bank account on the next business day after the cut-off time, which is known as T+1. It is important to note that the redemption amount will be credited to the bank account registered with the mutual fund, and the bank account should be in the name of the investor.

Exit Load For Liquid Funds

The exit load is applicable when you withdraw the money from liquid funds. Exit load is the fee charged by the fund house for early withdrawals.

As per the SEBI from October 2019, the exit load structure for liquid funds has been formalized. If you hold your investment in a liquid fund for one day, you will have to pay an exit load of 0.007%, and for two days it will be 0.0065%. 

The exit load will decrease gradually to 0.0045% on the sixth day, and there will be no exit load from the seventh day onwards.

Here are the steps to follow to sell the liquid funds in Zerodha:

Step #1. Log in to your Zerodha Coin account using your credentials.

Step #2. Go to the “Portfolio” section and select the liquid fund you want to sell.

Step #3. Then specify the quantity you want to sell. Zerodha will show you the current selling price for the liquid fund. Confirm the selling price before proceeding.

Step #4. Place a redemption request or click on ‘Sell’ button, and confirm your bank details, including the bank account where you want the money to be credited.

Step #5. Once you have placed the redemption request, the fund house will process it and credit the money to your bank account the next business day after the cut-off time which is 3:00 PM. 


What is the exit load for liquid funds?

The SEBI has formalized graded exit load structure on liquid funds since October 2019. As per the new structure, holding an investment for one day in the liquid fund would draw an exit load of 0.007%, for two days the exit-load will be 0.0065%, followed by 0.006%, 0.0055%, 0.0050%, 0.0045% on the third, fourth, fifth, and sixth day respectively. However, the exit-load from the seventh day onwards will be nil.

What are liquid funds?

Liquid funds are a type of mutual fund that invests in highly liquid money market instruments such as treasury bills, commercial papers, and certificates of deposits. They are suitable for short-term investments ranging from 1 day to 3 months.

Who should invest in liquid funds?

Liquid funds are ideal for investors who want to park their surplus funds for a short period. They are suitable for risk-averse investors looking for a safe investment option with low volatility.

How to invest in liquid funds?

You can invest in liquid funds through online and offline modes. For online investment, you can use a broker or an AMC fund house platform. For offline investment, you can visit the nearest AMC branch office or a registered broker.

Is a liquid fund better than FD?

Both liquid funds and FD are excellent low-risk investment options. However, liquid funds do not offer a fixed rate of return like an FD and are subject to market fluctuations. If you want to invest for the short term with good return, then liquid funds are a better option. While the FD is better for long-term investments.

Can I invest in liquid funds through SIP?

Yes, you can invest in liquid funds through SIP.

Are liquid funds safe?

Liquid funds are generally considered safe as they invest in debt securities with a maturity period of up to 91 days. However, it is essential to evaluate the credit rating of the fund before investing to ensure that the fund has invested in high-quality debt securities.

Why should you consider investing in a liquid fund instead of a bank’s savings account?

You can choose to invest in a liquid fund because liquid funds offer a slightly higher return than a bank’s savings account.

Currently (as of 2023), the average interest rate for a savings account is between 2.5% to 4%. On the other hand, a liquid fund can provide returns of 5% to 6%, making it a more attractive option for those seeking higher returns on their investments.

About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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