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What is a liquid funds?

How is liquid fund better than other funds? Should i invest in liquid funds for 1 year?


Liquid funds are debt mutual funds that invest money in short term market instruments like treasury bills, government securities, etc. These funds can invest in instruments with maturity of up to 91 days. Lower maturity periods helps a fund manager in meeting the redemption demand from investors.

Advantages of liquid funds:

  • Very low risk
  • High liquidity
  • No exit load
  • Small maturity period
  • Dividends from liquid funds are exempt from tax


Liquid funds as the name suggests are those funds in which the investments in a particular financial instrument can be easily withdrawn to get immediate cash. These funds invest in debt securities (eg debt mutual funds), highly liquid money market instruments such as treasury bills, commercial papers, certificate of deposit, government securities that hold very less risk. Various characteristic of liquid funds are:

  • Investments are done in securities having short maturity time
  • No lock in period
  • No entry and exit loads


  • Low risk and less volatile in comparison to other mutual funds
  • Easily converted to cash
  • Return on investment is 6-8%, higher than fixed deposits
  • Dividends on these are tax free

An investor can get better returns on these funds than if he parks his money in savings account or fixed deposits.

Pijush Kanti Biswas

Liquid fund is a type of debt mutual fund, invest in highly liquid money market securities like Commercial Paper(CPs), Treasury Bills and Certificate of Deposit(CDs).

Characteristics of liquids funds:

  1. Among all debt funds, liquid funds provide most stable returns.
  2. Easily converted in to cash that too within a day time.
  3. Liquid funds are best suited investors having surplus amount lying idle in savings bank account or FDs and are intent to get better returns.
  4. They invest in instruments with a maturity period of up to 91 days.
  5. Returns on investing in liquid funds is around 6-8%. Higher then fixed deposits.
  6. Easy liquidity. You get your money within a day.
  7. Tax benefits of liquid funds is that the dividends on these funds are tax free.

So, liquid funds are any day a better option on investment as compared to FDs giving higher return and liquidity as compared to FDs. Liquids funds are best for investors who are risk aversive in nature, do not wish to invest in stock market and expect fixed return on investment. 

Happy Investing!

Mridul Agrawal

Many a time, we have excess cash/ money at our disposal and we know that we would require the funds only after a few weeks or months. In such a situation, we usually tend to park our excess funds in a savings bank account. We earn interest on our short term deposit and we can withdraw it whenever we require them, without any restrictions. Most of us would do this, but is this the best utilization of the excess funds available at your disposal. But liquid funds are an alternate investment that can be considered for even better utilization of your funds in the short term.

Liquid funds helps investors earn a higher rate of interest as compared to a savings bank account with a considerably low risk. Liquid funds are simply debt mutual funds wherein the investor’s money is invested in very short-term market instruments such as treasury bills, government securities among others that hold least amount of risk. These funds invest in instruments having maturity up to a period of 91 days. The maturity is mostly much lower than that.

Additionally, these are lower risk bearing and less volatile among other mutual funds, for the reason that they invest in instruments bearing a high credit rating. Also unlike other mutual funds, the Net Asset Value (NAV) of liquid funds, do not change as frequently as compared to other mutual funds.

In the current high interest rate scenario, if an investor would like to earn some interest on their funds while he parks them in a bank, then liquid funds can do a better job than savings account.

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