some money sits in the bank account. not for emergency. not for next month’s expenses. just sitting there. earning 3-4%.
that is not optimal.
two common options for this money. liquid funds. fixed deposits.
both low risk. both accessible. but they work differently. one may suit the situation better.
here is what liquid funds are, which ones are worth looking at, and how to compare them.
what is a liquid fund. short and simple.
a liquid fund is a type of debt mutual fund. it invests in very short term instruments. treasury bills. commercial papers. certificates of deposit. all with maturity of up to 91 days.
|
feature |
liquid funds |
fixed deposits |
| returns | market linked, 6-7% currently | fixed, guaranteed |
| risk | low. not zero. | very low. insured up to ₹5 lakh. |
| liquidity | t+1 redemption. no lock in. | premature withdrawal penalty. |
| returns certainty | no guarantee. | guaranteed. |
| best for | short term surplus cash | fixed income needs |
that short maturity window is the point. low volatility. high liquidity.
money can usually be withdrawn within one business day. returns are better than a savings account. not much better. but better.
liquid funds vs fixed deposits. the difference.
data from ventura securities and stable money.
which liquid funds are worth looking at.
returns change constantly. these funds have shown consistency.
| fund name | aum (₹ cr) | expense ratio |
1 year return (%) |
| axis liquid fund | 56,167 | 0.21% | 6.75 |
| nippon india liquid fund | 31,752 | 0.20% | 6.72 |
| parag parikh liquid fund | 5,409 | 0.09% | 6.45 |
| category average | – | – | 6.31 |
data from et now, economic times, and equitymaster.
axis liquid fund has the largest aum. over ₹56,000 crore. high scale. low expense ratio. delivered 6.75% return in the last year.
parag parikh liquid fund has the lowest expense ratio. 0.09%. fund managers and insiders have meaningful investment in the scheme. that is good alignment.
how to compare liquid funds. three things.
one. expense ratio.
this is the fee the fund charges. lower is better. direct plans have lower expense ratios than regular plans.
two. portfolio quality.
check what the fund holds. high allocation to aaa, a1+, or government securities is safer. some funds hold 100% in aaa/a1+ rated assets. others have more sovereign exposure.
three. yield to maturity (ytm).
this is the expected yield from the fund’s portfolio. higher ytm means higher potential return. also slightly higher risk. currently around 6.2-7% for liquid funds.
important disclaimer. liquid funds are not zero risk.
liquid funds are safe. not risk free.
credit risk. interest rate risk. liquidity risk. small. present.
during the 2018 il&fs crisis, some debt funds faced redemption pressure. liquid funds were impacted. not heavily. but it happened.
do not assume liquid funds are like fixed deposits. they are not. fds guarantee capital. liquid funds do not.
when to choose liquid funds
liquid funds work for specific situations.
emergency fund. safety plus better than savings account returns. liquid funds give t+1 access.
money for short term goal. down payment. vacation. tax payment. 3-12 months away. liquid funds are better than equity for this.
parking money before deploying. sold some stocks. waiting for the right entry. park in liquid fund. earn something while waiting.
when to choose fixed deposits
fixed deposits fit other situations.
guaranteed returns needed. no risk on capital. the ₹5 lakh insurance matters.
senior citizens or retired people. fixed income matters more than returns. fds give predictability.
FAQs
1. are liquid funds safer than equity funds ?
yes. much safer. they invest in short term debt. not stocks. volatility is minimal.
2. can i withdraw from liquid fund anytime ?
yes. redemption is processed on t+1 basis. money comes to the bank account within one business day.
3. how are liquid funds taxed ?
gains are taxed as per income tax slab. no indexation benefit after april 1 2023. all gains are short term.
4. which is better for tax. liquid fund or fd ?
depends on the bracket. for 30% slab, both are similar. debt funds no longer have indexation benefit. fd may be comparable post-tax.
5. what is the minimum amount for liquid funds ?
most funds accept ₹500 or ₹1,000 for lumpsum. sips can start from ₹100 or ₹500.
