What are Liquid Funds? – List of Best Liquid Mutual Funds to Invest in 2021

What are Liquid Funds? Majority of retail investors believe that all mutual funds are highly risky and suited only for aggressive investors investing for the long-term.   But this is not true.  If your goal is in 1-18 months time and you want to take very less risk but earn better returns than a bank FD then you should invest in liquid mutual funds But before you invest in liquid mutual funds, you should check the paper quality and credit risks associated with them to avoid losing your hard-earned money.  In this article, we will reveal the list of 5 best liquid funds to invest in India and also understand: 
  • What are liquid mutual funds?
  • List of best liquid mutual funds in India
  • Who should invest in liquid mutual funds?
  • Things to consider before you invest in liquid mutual funds
  • What are the benefits of investing in liquid mutual funds?

What are Liquid Mutual Funds? 

Liquid mutual funds or liquid funds are a category of debt mutual funds that primarily invest in financial instruments like treasury bills, government securities, call money etc. with maturity up to 91 days. The advantage of investing in liquid funds is that it provides high liquidity and safety. But do note that it does not guarantee safety of principle like bank FDs. 

List of Top 5 Liquid Mutual Funds in India

Funds MF Rating 1Y 3Y 5Y Since Inception
 Aditya Birla Sun Life Liquid Fund - Growth 5 Star    4.39% 6.19% 6.59% 7.33%
 Tata Liquid Fund Regular Plan Growth 5 Star    4.40% 6.15% 6.56% 7.39%
 SBI Liquid Fund Regular Growth 5 Star    4.27% 6.05% 6.47% 8.75%
Motilal Oswal Liquid Fund Regular Growth 4 Star    3.43% 0.00% 0.00% 3.69%
 Sundaram Money Fund Regular Growth 5 Star    4.27% 6.11% 6.52% 7.47%
** The above ranking is as on 16th December 2020. To check the latest data and ranking of all mutual funds click here Note: While we have revealed the names of the best liquid funds to invest in for 2021, you also need to know the RIGHT time to invest in these liquid funds.  To know if this is the RIGHT  time to invest in these 5 liquid funds, visit www.rankmf.com  

Who Should Invest in Liquid Funds?

  • If you want to park your surplus money for a short time and your risk appetite is low, then you should invest in liquid mutual funds
  • If you want to beat the returns of a Bank FD in the short-term, then you should invest in liquid mutual funds.
  • If you want to perform cost-averaging via systematic transfer plan (STP), then you should invest in liquid funds
  • If you are planning to create a contingency fund, then you should invest in liquid funds instead of bank RDs. 

Things to Consider Before you Invest in Liquid Mutual Funds

1. Credit Quality: Investors should invest in liquid funds with AAA rated papers issued by the government, quasi-government and public sector companies only. Papers issued by private companies carry substantial credit risks. Credit risk refers to the risk of the issuer of security defaulting on payment of principal amount and interest. Therefore, always invest in liquid funds with AAA rated papers issued by government/quasi-government or public sector companies. 2. Cost: While selecting liquid funds to invest in, carefully look at the expense ratio and exit load of the fund to ensure higher returns and easy liquidity. 3. Past Performance: The past performance of a fund helps in judging its future prospects. While investing in liquid funds, study the past performance of the fund against its benchmark and peers and then invest in the best fund. 4. Minimum investment: The minimum investment amount will vary from Rs 500 to Rs 5,000 depending on the fund house. So, invest in liquid funds with low minimum investment requirements.  

What are the Benefits of Investing in Liquid Mutual Funds?

  • High liquidity- Investors can liquidate their investment within 24 hours.  
  • Very low-risk investment- Liquid Fund papers have a maturity duration of upto 91 days only and their NAVs are mostly stable. 
  • Bank FD-beating returns- Liquid funds offer higher returns than savings bank accounts and bank FDs. 
  • Easy Exit- Liquid funds have an exit period of only 1 week. 
  • Quick redemption-Unlike equity mutual funds, liquid fund redemption proceeds are received within one day.
  • Partial redemption- Partial withdrawal is also allowed in liquid funds, which is not possible with fixed deposits.

Tax implication on Liquid Mutual Funds

Taxation of liquid funds is similar to debt fund taxation. 
  • If liquid funds are held for more than three years then the gains are taxable at 20% with indexation & 
  • If held for less than three years then the gains are added to investors income and taxed as per the applicable tax slab.


Investing in liquid mutual funds is easy, safe and profitable. Liquid mutual funds can be redeemed in a day and provide better returns than bank FDs.  To invest in the best liquid mutual funds for 2021, open a Samco Demat and trading account today and get exclusive and FREE access to RankMF – The best mutual fund investment platform in India.  [Recommended reading: 29 different types of mutual funds in India]

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