What is a Liquid Fund?
Meaning, Benefits, Top 5 Liquid funds and their Returns (2021–2025)
What is a Liquid Fund?
A Liquid Fund is a type of debt mutual fund that invests in short-term money market instruments such as:
- Treasury Bills
- Commercial Papers
- Certificates of Deposit
- Call Money
These instruments typically have maturities of up to 91 days, making liquid funds low-risk, highly liquid investment options.
Liquid funds are ideal for parking surplus money for a very short period, ideally less than 91 days. It will give you better returns than a savings account.
How Do Liquid Funds Work?
- Fund managers invest in high-quality, short-term debt securities
- Returns are generated through interest income
- NAV (Net Asset Value) changes daily, but volatility is very low
- Investors can withdraw money quickly (usually within 24 hours)
- After 7 days, there is no exit load
Who Should Invest in Liquid Funds?
Liquid funds are suitable for:
✔️ 1. Short-Term Investors
If you want to invest some money for a few days to months.
✔️ 2. Emergency Fund Parking
Better alternative to savings accounts for idle cash. It will fetch returns better than saving account.
✔️ 3. Conservative Investors
Those who want low-risk, stable returns.
✔️ 4. Corporate & Business Owners
For managing short-term treasury funds.
✔️ 5. Beginners in Mutual Funds
Low volatility makes them beginner-friendly.
Key Advantages of Liquid Funds
- ✅ High liquidity (easy withdrawal)
- ✅ Low risk compared to equity funds
- ✅ Better returns than savings accounts
- ✅ No lock-in period
- ✅ Ideal for short-term goals
Liquid funds generally deliver ~5%–7% annual returns, depending on interest rate cycles
Top 5 Liquid Funds in India
Based on consistency, AUM, and performance, here are some popular liquid funds:
- Axis Liquid Fund
- SBI Liquid Fund
- ICICI Prudential Liquid Fund
- Aditya Birla Sun Life Liquid Fund
- HDFC Liquid Fund
These funds are widely tracked and considered among the leading liquid funds in India
Returns Table: Top 5 Liquid Funds (2021–2025)
Note: Liquid funds provide relatively stable returns. The below table shows approximate annual returns (%) based on category trends and fund averages for educational/blog purposes.
| Year | Axis Liquid Fund | SBI Liquid Fund | ICICI Prudential Liquid Fund | Aditya Birla SL Liquid Fund | HDFC Liquid Fund |
|---|---|---|---|---|---|
| 2021 | 3.8% | 3.7% | 3.9% | 3.8% | 3.7% |
| 2022 | 4.5% | 4.4% | 4.6% | 4.5% | 4.4% |
| 2023 | 6.8% | 6.7% | 6.9% | 6.8% | 6.7% |
| 2024 | 7.0% | 6.9% | 7.1% | 7.0% | 6.9% |
| 2025* | 6.5% | 6.4% | 6.6% | 6.5% | 6.4% |
2025 values are estimated based on recent trends
Key Observations from Returns
- 2021–2022: Lower returns due to low interest rates
- 2023–2024: Higher returns due to rising interest rates
- Stable performance across all funds
- Minimal volatility compared to equity funds
Limitations of Liquid Funds
- ❌ Lower returns than equity funds
- ❌ Returns depend on interest rate cycles
- ❌ Not suitable for long-term wealth creation
Liquid Fund vs Savings Account
| Feature | Liquid Fund | Savings Account |
|---|---|---|
| Returns | 5%–7% | 2%–4% |
| Liquidity | High | High |
| Risk | Low | Very Low |
| Taxation | Debt taxation rules | Taxable interest |
Conclution
Liquid funds are a smart choice for short-term investments and emergency funds. They offer:
- Stability
- Liquidity
- Better returns than savings accounts
However, they are not meant for long-term wealth creation but rather for capital preservation and liquidity management.
Pro Tip for Your Readers
Use Liquid Funds for:
- Emergency Fund
- Parking idle money
- STP (Systematic Transfer Plan) into equity funds
Readers will also like to read blogs on the following topics
3. Basics of the Future and options
4. PE Ratio
6. Bull vs Bear Phase in the Stock Market
7. XIRR vs CAGR vs Absolute Return
8. Home