Best Liquid Mutual Funds

Here are some features of liquid funds:

Asset allocation: As per the Securities and Exchange Board of India (SEBI) rules, liquid mutual funds must invest in debt and money market instruments with a maximum maturity period of 91 days. 

Risk-reward ratio:  The returns generated by top liquid mutual funds depend on the market price of the underlying debt and money market instruments. Nevertheless, since the prices of these short-term securities do not change as much as that of mid-term and long-term bonds, these funds are much more stable than other debt fund schemes. 

Short-term Capital Gains Tax: In case investors sell their units in a liquid fund before a holding period of 3 years, he/she will earn short-term capital gains. Such gains are added to the individual’s income for the financial year and taxed as per their slab rate. 

Long-term Capital Gains Tax: When investors sell units after 3 years from the date of purchase, the proceeds are referred to as long-term capital gains. A tax rate of 20% along with indexation benefit is applicable on such gains. 

The best liquid mutual funds 2022 are a suitable option for investors with a short-term investment horizon. These schemes have the potential to generate higher returns than a savings bank account. Liquid funds are also appropriate for contingency funds. The schemes primarily focus on capital preservation while generating stable returns. Also, investors can redeem their units in a fund whenever it is necessary. Nevertheless, before investing in the best liquid mutual funds, they must keep certain things in mind. Let’s find out what they are: 

Risk appetite: Liquid funds are the least risky of all debt funds. However, one must note that “least risky” doesn’t mean that there’s no risk at all. Like other types of debt funds, they are subject to interest rate risk and credit risk. Hence, investors must assess their risk profile before allocating their savings to these mutual fund schemes. 

Investment goal: One must note that liquid funds do not focus on wealth maximisation; they are focused on safeguarding one’s capital while generating a modest return. Investors must make sure that their financial goals are in sync with the objective of a scheme they choose. 

Expense ratio: Comparing the expense ratio of different schemes is imperative for investors looking for the best liquid mutual fund. These schemes more or less earn similar returns. Hence, a fund with a high expense ratio will significantly reduce the returns generated. For example, suppose two funds deliver returns of 5% and 5.5%, respectively. Let’s say the expense ratio of the first fund is 0.2%, and the second fund is 0.8%. Therefore, the actual yield will be 4.8% and 4.7%. Hence, a fund with a lower expense ratio may be more profitable for an investor. 

Past performance of the fund: Unlike bank fixed deposits, returns of liquid funds are not fixed as they depend on market interest rates. Hence, it’s essential for investors to check and compare the historical returns of different schemes and opt for one with a consistently strong performance.  Past performance does not guarantee future outcomes. Nevertheless, past performance helps us assess how the fund has responded to economic conditions.

Experience of the fund manager: The success of the best liquid mutual funds depends on the experience and ability of fund managers. They use different risk management techniques to assess the risks associated with an investment and take decisions accordingly. A fund manager with a proven track record is more likely to fulfil the goal of a specific scheme.

Regular or growth plan: When an investor opts for a direct plan, he/she can invest with an asset management company (AMC) directly. In the case of a regular plan, investors have to facilitate the transaction via a third party, for example, a broker or a distributor. Thus, fund houses have to incur commission or brokerage additionally. That’s why regular plans have a higher expense ratio and report a lower NAV.

Minimal risk: These are associated with lower risk compared to most other mutual funds. They provide stability across different interest rate cycles in the market by investing in high-quality securities with a maturity period of up to 91 days. 

Low cost: The best liquid mutual funds are low-cost options as fund managers do not manage the portfolio of these schemes as actively as other types of debt funds. Most liquid funds have an expense ratio below 1%. This allows the fund to maximise returns for investors. 

Fast redemption process: Fund houses process the redemption request of investors within one business day. Moreover, there are some AMCs that process redemption requests immediately. This is possible only because the underlying securities of these mutual fund schemes are highly liquid. 

Flexible holding period: Investors may remain invested in a fund for as long as they want. They can even withdraw their funds in case of any urgency; no exit load is charged seventh day onwards from the date of purchase. That’s why these funds are a suitable option for investors looking to maintain a contingency fund. 

Choice of investment mode: Individuals can invest in liquid funds in two ways – lump sum and systematic investment plan. By choosing the lumpsum route, investors can allocate the entire amount to a fund in one go. Conversely, a SIP allows one to invest in a scheme by depositing a fixed amount at regular intervals (monthly, quarterly, etc.).