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Invest in Top Liquid Mutual Funds In 2022: High Return Mutual Funds In India

Get to read in detail about the best Liquid Mutual Funds to Invest in. Know the list, taxation related to the Liquid Mutual Funds and more!. Liquid funds: Good option to park money for short term
Top Liquid Mutual Funds

Are you looking to build and maintain an emergency fund or park a lump sum amount you have received for the short term? In that case, you should consider investing in liquid debt funds. This article will discuss how to invest in top liquid mutual funds in 2022. 

An introduction to liquid mutual funds

A liquid fund is an open-ended scheme that invests money in debt and money market securities with a residual maturity of up to 91 days only. Financial security may have a tenure of 91 days, for example, a Government Bond with a tenure of 5 years. But, a liquid fund can invest in it only when the residual (remaining) maturity is 91 days or less.

Liquid fund returns

Now that we understand what liquid funds are, let us look at the returns given by some of the best liquid funds.

Scheme name
(Direct Plan - Growth option)
AUM (Rs. crores)1-year (Absolute Returns)3-years (CAGR)5-years (CAGR)
Quant Liquid Plan4934.26%5.50%6.14%
IDBI Liquid Fund9053.48%4.74%5.72%
Mahindra Manulife Liquid Fund1,7293.48%4.71%5.71%
Edelweiss Liquid Fund1,0453.51%4.72%5.69%
Nippon India Liquid Fund22,4893.45%4.67%5.67%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/liquid-fund.html)

The above table shows the top liquid funds have given returns in the range of 5.67% to 6.14% CAGR in the last five years.Note: The returns are as of 15th Feb 2022.

Who should invest in liquid mutual funds?

Liquid mutual funds are meant for the following purposes:

If you are looking for short-term investments

  • Have you received a lumpsum amount as your annual bonus? Or have you recently changed your job and received your full and final settlement for leave encashment, gratuity, Employee Provident Fund (EPF) from your previous employer? Or have you received a lumpsum amount as maturity/redemption/sale proceeds from an asset? If you are figuring out how to invest this lump sum amount for the long term, you can park this amount in a liquid fund in the interim period.

To build an emergency fund

  • Are you looking to build and maintain an emergency fund? Liquid funds are an excellent financial product for this purpose. The amount in the emergency fund should be equivalent to three to six months' income. The amount comes in handy during financial emergencies such as job loss, salary cuts, salary delays, medical emergencies, or any other contingency.

Taxation of liquid funds

For taxation purposes, liquid mutual funds are categorised as debt mutual funds and taxed accordingly.

Short-term capital gains (STCG) tax

  • If you sell your liquid mutual fund units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.

Long-term capital gains (LTCG) tax

  • If you sell your liquid mutual fund units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.

Risks involved in liquid mutual funds?

Liquid mutual funds are considered to be safer than many other debt funds and equity mutual funds. As liquid funds invest in securities with a maturity period of up to 91 days or less, the risk of returns getting affected due to changes in interest rates is low. 

But what about credit risk? Liquid mutual funds invest in securities such as treasury bills (T-Bills) and bonds (G-secs) issued by the central government, state development loans (SDLs) issued by state governments, commercial papers (CPs) issued by corporates, certificates of deposits (CDs) issued by banks. 

Most of these financial instruments issued by the central government, state governments, banks, and corporations have either the highest or one of the highest credit ratings. Hence, the risk of credit default is low.

Returns from liquid funds

The returns from liquid funds will be moderate to low. The fund manager's objective is to take as low risk as possible and generate proportionate returns. The focus is more on protecting the capital rather than generating returns on it.

Advantages of liquid funds

Some liquid funds provide the instant redemption option. The option is advantageous to people who want to withdraw money from their emergency fund. Under the instant redemption option, an investor can redeem their units and receive the money instantly in their bank account through IMPS. 

There are limitations on the amount that can be withdrawn using the instant redemption option. For example, a liquid fund may allow a maximum withdrawal of 90% of the investor's balance or Rs. 50,000, whichever is lower through the instant redemption option. The investor will have to follow the normal redemption process for the balance amount redemption. The money is credited to the investor's bank account as per the normal T+2 settlement cycle.

Reasons to invest in liquid funds

Some of the reasons for investing in liquid funds include:

  1. It is a good financial product to build and maintain an emergency fund, which is the first step for investors towards their financial planning journey.
  2. It is a good financial product to park a lumpsum amount for a short period till you figure out where to invest it for the long term.
  3. The credit risk involved is low as the fund invests in debt instruments with the best credit ratings.
  4. Some liquid funds provide the instant redemption option in which the money is instantly transferred to the investor’s bank account through IMPS.
  5. As the fund invests in debt securities with a residual maturity of up to 91 days only, the impact of interest rate volatility on the fund is low.

Conclusion

As an investor, if you are planning to build and maintain an emergency fund or have received a lumpsum amount and want to park it for the short term, liquid funds are one of the best financial products for it.

To start investing in ELSS mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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