Why Liquid Funds Deserve a Place in Your Portfolio

Most of us keep emergency funds or short-term savings in a savings account or fixed deposits (FDs). While safe, these options earn just 2.5% to 4% interest, which doesn’t even beat inflation. If you’re someone who wants safety and better returns without locking in money, liquid mutual funds are a smart alternative.

MUTUAL FUND

8/17/20252 min read

What is a Liquid Fund?

A liquid fund is a type of debt mutual fund that invests in very short-term instruments — like treasury bills, commercial papers, and call money — with a maximum maturity of 91 days. These instruments are issued by the government or top-rated companies, making them low-risk and highly liquid.

How to Choose a Good Liquid Fund?

To find a reliable liquid fund, focus on these factors:

  1. 1-Year Return – Past 12-month return is a good indicator, since liquid funds are for short holding periods.

  2. Expense Ratio – Lower the better; it eats into your returns.

  3. Portfolio Quality – Check for investments in AAA/A1+ rated instruments and sovereign securities.

  4. AUM (Assets Under Management) – A healthy AUM indicates trust and liquidity.

Good Examples to Consider

  • Canara Robeco Liquid Fund – Delivered ~7.3% return over the past year with a very low expense ratio of 0.08%. Strong choice for low-cost investing.

  • PGIM India Liquid Fund – Known for consistency and competitive returns. Maintains a well-diversified short-term portfolio.

  • Aditya Birla Sun Life Liquid Fund – Slightly higher expense ratio, but reliable performance and brand trust.

  • Axis Liquid Fund – Strong performer with ~7.2% return and expense ratio around 0.12%. What sets it apart is its instant redemption feature.

Axis Liquid Fund – A Practical Edge

While Axis Liquid Fund is comparable in return and safety, it offers a unique feature many investors value:

  • Instant Redemption – Redeem up to ₹50,000 anytime — even on weekends or bank holidays.

  • Funds are credited to your bank account within seconds via IMPS.

  • No waiting till the next working day. Ideal for emergency cash, last-minute payments, or simply better flexibility than a traditional FD.

This small but powerful feature makes Axis Liquid Fund a top pick for those who want speed and convenience along with safety and return

Are Liquid Funds Safe?

Yes — while no mutual fund is completely risk-free, liquid funds invest in short-duration, top-rated instruments, making them one of the safest categories in the mutual fund universe.

Additionally:

  • They have no exit load if held for 7 days or more.

  • Short-term capital gains are taxed as per your tax slab, but post-indexation (if held for 3 years), they become more tax-efficient than FDs.

  • SEBI regulations cap the credit and interest rate risk for added safety.

Final Thoughts

Liquid funds are not about making you rich, they are about managing cash smartly.

Instead of letting your idle money sit in a low-interest savings account, put it to work with better returns, full liquidity, and minimal risk. Whether it’s for your emergency fund, a short-term goal, or temporary parking between investments, liquid funds are a practical and intelligent choice.

Make sure to review performance, cost, and features — and choose the one that fits your needs. Sometimes, even small upgrades in where you park your money can have a big long-term impact.