Liquid Fund

Investments

A liquid fund is a debt mutual fund investing in short-term money market instruments maturing within 91 days. They offer slightly higher returns than savings accounts (6.5-7.5%) with almost equivalent safety and can be redeemed within 1 business day.

In detail

Liquid funds are designed as a parking space for short-term money -- emergency fund, money waiting to be deployed, or short-term savings. Very low credit risk (invest in highest-rated paper), low interest rate risk (very short duration), and high liquidity (T+1 redemption).nnBest use cases: emergency fund (3-6 months expenses), short-term surplus before deployment into equity, and as an STP source -- park lumpsum in liquid fund, auto-transfer fixed amount to equity fund monthly.

Formula

Returns reflected in daily NAV change Annualised return = (NAV today - NAV 365 days ago) / NAV 365 days ago x 100

Real-life example

🇮🇳 India example

Sanjay keeps Rs 6 lakh emergency fund in a liquid fund at 7.2% vs savings account at 3.5%. Annual difference: Rs 22,200. Over 5 years compounded: Rs 1.4 lakh more from the same money with identical safety and accessibility.

Frequently asked questions

Is a liquid fund safer than a bank FD? ▼

Liquid funds investing in government securities or AAA-rated instruments are very safe but not guaranteed like bank deposits (DICGC insurance up to Rs 5L). In practice, liquid funds from reputed AMCs have rarely lost money. For amounts above Rs 5L, liquid funds may actually be safer than concentrating all money in one bank.