Liquid Funds: The Lazy Investor’s Shortcut to Smart Returns!
Brokerage Free Team •March 6, 2025 | 4 min read • 4275 views
Brokerage Free Team •March 6, 2025 | 4 min read • 4275 views
What Is a Liquid Fund? Meaning, Risk, Returns, Benefits & Taxation
In the fast-paced world of investments, where volatility can make even the seasoned investor's heart skip a beat, liquid funds emerge as the knight in shining armor. Imagine a savings account that works harder, offers better returns, and lets you withdraw your money almost instantly—that, in essence, is a liquid fund! But before you jump in, let’s dissect liquid funds layer by layer, exploring their meaning, risks, returns, benefits, and taxation.
A liquid fund is a type of debt mutual fund that invests in short-term, highly liquid instruments such as treasury bills, commercial papers, certificates of deposit, and other money market securities. The maturity period of these instruments does not exceed 91 days, making liquid funds one of the safest mutual fund categories available. These funds are ideal for parking surplus funds that you may need in the short term, offering better returns than a traditional savings account while maintaining easy accessibility.
While liquid funds are considered low-risk, they are not completely risk-free. Let’s break it down:
Liquid funds typically offer returns in the range of 4% to 7% per annum, depending on market conditions. While these returns may not seem spectacular, they are significantly better than a standard savings account (which averages 2.5% to 3.5% per annum in India). Moreover, liquid funds tend to outperform fixed deposits (FDs) of comparable tenure, especially when interest rates are on a downward trajectory.
Year | Average Returns |
2020 | 4.0% - 4.5% |
2021 | 3.5% - 4.0% |
2022 | 4.5% - 5.5% |
2023 | 5.5% - 6.5% |
(Note: Returns vary across different funds and market scenarios.)
Liquid funds are taxed under the debt fund taxation rules. Here’s how it works:
Let’s assume you invest ₹10 lakh in a liquid fund and earn 5% returns in one year. That’s a gain of ₹50,000. If your tax slab is 30%, you pay ₹15,000 in tax on short-term gains. However, if you hold it for 3+ years, you can apply indexation benefits, significantly reducing the taxable amount.
Liquid funds are an excellent short-term investment vehicle that bridges the gap between savings accounts and fixed deposits. While they may not generate massive wealth, they offer a combination of safety, liquidity, and reasonable returns that makes them indispensable for smart investors. If you want easy access to your money with better returns than a bank account, liquid funds are undoubtedly a great option!
So, the next time you have some idle cash sitting in your savings account, let your money work for you by parking it in a liquid fund!
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