Liquid Funds: A Safe & Smart Investment Option for Short-Term Goals
Looking for a better alternative to your savings account? Want to park your idle money or emergency fund without locking it in a fixed deposit? Liquid funds might be the ideal low-risk, high-liquidity solution you've been searching for.
In this post, I will explain what liquid funds are, how they work, and why they can be a smart part of your personal finance strategy.
What is a Liquid Fund?
A liquid fund is a type of debt mutual fund that invests in short-term money market instruments like:
- Treasury Bills (T-Bills)
- Commercial Papers (CPs)
- Certificates of Deposit (CDs)
- Government Securities
These instruments have maturities of up to 91 days, making liquid funds one of the most secure options within the mutual fund universe.
Note: You need not wait for 91 days to mature, you can withdraw / redeem money any time you want.
Benefits of Investing in Liquid Funds
1. Higher Returns than Savings Account
Liquid funds offer returns in the range of 6% to 7.5%, usually more than what most savings accounts provide (typically 2.5%–4%).
2. No Lock-in Period
Unlike FDs, liquid funds have no lock-in period. You can withdraw anytime.
3. Tax Efficiency
Returns / Profits from liquid fund are taxed based on your income tax slab. If you are under zero(0) income tax slab (currently under 12 Lakhs / Year), you don't need pay taxes on profits. But in case of FD, you will get maturity amount after deducting TDS even if you are in zero(0) income tax slab.
4. Instant Liquidity
Most AMCs offer same-day or next-day redemption. That makes liquid funds ideal for emergency funds or short-term needs.
5. Low Risk, High Safety
Since these funds invest in high-quality, short-duration instruments, they carry very low credit and interest rate risk.
Tip: Choose liquid fund with higher AUM(Asset under management) company
Who Should Invest in Liquid Funds?
- People looking to park idle money for a few days to a few months
- People building an emergency fund
- People who want better returns than a savings account without taking much risk
- Excess cash that you are not able to decide what to do, park it into Liquid fund.
Things to Keep in Mind
- Returns might be ups and down a bit, it will not be expect flat return.
- Exit load may apply if withdrawn within 7 days (usually between 0.01%–0.1%)
- Not suitable for long-term wealth creation (better suited for short durations)
Don't worry on returns, It will definitely gives you return as good as FD / RD.
My Thoughts
Liquid funds in India are an excellent way to earn higher returns than savings accounts without compromising on safety or liquidity. Whether you’re managing an emergency fund, surplus salary, or business capital, liquid mutual funds provide flexibility, ease, and efficiency.
Use our SIP Calculator to calculate your returns from liquid fund
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