Most people just let their money sit idle in the savings bank account either because they are very risk averse or they do not have the expertise to invest. For such people, liquid funds are a fabulous option.

The interest rates paid by the savings bank account are relatively low. Following is the list of interest rates offer by the banks in India:

Savings Bank Interest Rates

BANK INTEREST RATE
Yes Bank Savings Value Account Interest Rate 5.00% – 6.25%
Kotak Bank Nova Savings Account Interest Rate 5.00%-6.00%
Standard Chartered Basic Banking Account Interest Rate 4.00%
Canara Bank Savings Bank Account Interest Rate 4.00%
Citibank Savings Accounts Interest Rate 4.00%
UCO Bank Saral Savings Deposit Scheme Interest Rate 4.00%
IDFC Bank Savings Account Interest Rate 4.00%
Andhra Bank Abhaya SB Account Interest Rate 4.00%
South Indian Bank Regular Savings Interest Rate 4.00%
IDBI Bank Super Savings Account Interest Rate 4.00%
SBI Bank Savings Bank Account Interest Rate 3.50%-4.00%
Indian Bank Savings Bank Account Interest Rate 3.50%-4.00%
HDFC Bank Regular Savings Account Interest Rate 3.50%-4.00%
PNB General Savings Account Interest Rate 3.50%-4.00%
ICICI Bank  Regular Savings Account Interest Rate 3.50%-4.00%
Bank of Baroda Savings Account Interest Rate 3.50%-4.00%
Axis Bank Basic Savings Account Interest Rate 3.50%-4.00%

The table shows the interest rate by the top banks.

Most of the banks in India offer 4% interest rate per annum on the savings deposit even though the Reserve Bank of India has deregulated the interest rate on savings bank.

Those banks which offer a little higher rate demand a high minimum balance amount in the account.

Therefore the surplus amount parked in savings accounts yield a very low-interest-rate earning which might not be enough even to cover the inflation.

But liquid funds offer higher rates without compromising on the amount and time of investment.

What are Liquid Funds?

Liquid fund meaning: liquid funds are a type of mutual fund with incredibly low-risk associated with them. The returns given by them are slightly higher than what you would get in a savings bank account.

They are also very liquid – which means it takes very little time to invest and take out money from liquid funds.

While other mutual funds can take anywhere between 3-4 working days to invest and redeem money, liquid funds take around 1-2 working days.

Liquid funds are mutual funds where the investments are majorly done in very short-term or money market instruments such as treasury bills, certificate of deposits, term deposits and commercial paper.

With the bank interest rates going down, many investors use the liquid funds to park their money for a short period of time.

Returns from Liquid Fund

Like all other mutual funds, liquid funds also invest in securities that have a market price and Net Asset Value (NAV) which moves accordingly with the movement of the market price.

But the movement in the NAV of the liquid fund is not like other mutual funds because the interest earned by the funds through the tenure of the security is divided equally for the number of days the security is held making fund’s NAV movement more or less linear (like a steady line going up).

During the period of high inflation, the Reserve Bank keeps interest rates high and tightens the liquidity thus making the liquid funds one of the best investment options.

Tax on Liquid Funds

Liquid funds taxation: For gains made before a year from investment, investors are taxed as per the income slab similar to the tax on interest earned on savings bank account.

For long-term capital gains i.e. if the funds are redeemed after 3 years, it is taxed at 11.33% (including surcharge and cess) or 22.66% with the benefit of indexation, whichever is lower.

Read: Tax on mutual funds. 

Top 5 Liquid Funds Returns

  1. Reliance Liquid Fund

Fund House Reliance Mutual Fund
Scheme Open-ended
Objective Generating optimal returns with moderate level of risk and high liquidity through investing in money market securities and high quality debt instruments
Start Date January, 2013
Category of Fund Liquid
Benchmark CRISIL Liquid Fund Index
Fund Size Rs 29858.68 Cr.
Face Value (Rs/Unit) 1000.00
Fund Manager Anju Chhajer (Since : Oct, 2013)
SIP Availability Yes
Expense Ratio 0.14
NAV (as on May 27, 2018) Rs 4284.94

Following are the historic returns of the fund:

Returns 1Y 3Y 5Y Mean
Reliance Liquid Fund 6.90% 7.42% p.a 8.14% p.a 7.13%

 HDFC Liquid Fund

Fund House HDFC Mutual Fund
Scheme Open-ended
Objective Generating steady and reasonable income having low risk and high liquidity with a portfolio of money market securities and high quality debt instruments.
Start Date October, 2000
Category of Fund Liquid
Benchmark CRISIL Liquid Fund Index
Fund Size Rs 32163.36 Cr.
Face Value (Rs/Unit) 1000.00
Fund Manager Anupam Joshi (Since: Oct, 2015)

Rakesh Vyas (Since: May, 2012)

SIP Availability Yes
Expense Ratio 0.25
NAV (as on May 27, 2018) Rs 3445.78

Following are the historic returns of the fund:

Returns 1Y 3Y 5Y Mean
HDFC Liquid Fund 6.73% 7.33% p.a 8.08% p.a 7.38%

ICICI Prudential Liquid Fund

  • Fund House ICICI PrudentialMutual Fund
    Scheme Open-ended
    Objective The fund aims to generate steady and consistent return from a portfolio of investments in money market securities and high quality debt instruments
    Start Date January, 2013
    Category of Fund Liquid
    Benchmark CRISIL Money Market Index
    Fund Size Rs 34921.01 Cr
    Face Value (Rs/Unit) 100.00
    Fund Manager Rahul Goswami

    Rohan Maru

    SIP Availability Yes
    Expense Ratio 0.12
    NAV (as on May 27, 2018) Rs 259.06

    Following are the historic returns of the fund:

    Returns 1Y 3Y 5Y Mean
    ICIC Prudential Liquid Fund 6.85% 7.38% p.a 8.12% p.a 7.45%

L & T Liquid Fund

  • Fund House L & T Mutual Fund
    Scheme Open-ended
    Objective Generate reasonable returns providing the investors high liquidity by investing predominantly in a well-diversified portfolio of money market securities, government securities and corporate debt
    Start Date January, 2013
    Category of Fund Liquid
    Benchmark CRISIL Liquid Fund Index
    Fund Size Rs 14526.86 Cr.
    Face Value (Rs/Unit) 1000.00
    Fund Manager Shriram Ramanathan (Since: Jan, 2013)

    Jalpan Shah (Since: June, 2014)

    SIP Availability Yes
    Expense Ratio 0.09
    NAV (as on May 27, 2018) Rs 2408.69

    Following are the historic returns of the fund:

    Returns 1Y 3Y 5Y Mean
    L & T Liquid Fund 6.92% 7.40% p.a 8.11% p.a 7.08%

Indiabulls Liquid Fund

  • Fund House Indiabulls Mutual Fund
    Scheme Open-ended
    Objective Providing a high level of liquidity with returns commensurate with low risk through investing in a portfolio of money market and debt securities
    Start Date October, 2011
    Category of Fund Liquid
    Benchmark CRISIL Liquid Fund Index
    Fund Size Rs 7171.65 Cr.
    Face Value (Rs/Unit) 1000.00
    Fund Manager Malay Shah (Since: August, 2014)
    SIP Availability Yes
    Expense Ratio 0.16
    NAV (as on May 27, 2018) Rs 1707.68

    Following are the historic returns of the fund:

    Returns 1Y 3Y 5Y Mean
    Indiabulls Liquid Fund 6.93% 7.55% p.a 8.21% p.a 7.28%


    Benefits of Liquid Funds

  • +The interest rates offered by the bank deposits have been declining in the recent year in India thus investing a portion of surplus cash in liquid funds may give better returns.
  • +The moderate return trend of the liquid funds is likely to continue in the near future seeing the present economy of India.
  • +Liquid funds invest in fixed maturity interest-paying instruments like commercial paper, non-convertible debentures, treasury bills, etc.
  • +The NAV of liquid funds is less volatile when compared to other mutual funds.
  • +The current falling trend in short-term securities can reverse making liquid funds one of the most attractive investments.
  • +The indexation benefit is available for liquid funds for tax purposes which is not available on bank fixed deposits.
  • +Most liquid funds have no entry load and exit load making it easy and cost effective investment. The lower expense ratio helps in getting a higher return.
  • +The liquid funds have no lock in period thus it is readily available to be converted as per the desire of the investor.
  • +Liquid funds are fast. If an individual places a request for redemption today by 2 p.m. the funds would be credited in the bank account by 10 a.m. the next day. All the request and credit of fund would be processed on business days.
  • +Being primarily invested in fixed income securities with a short period, liquid funds have the lowest interest rate risk.
  • +As per the needs, the investor can choose liquid funds among different available plans like daily dividend plan, growth plan, etc.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.