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How to select the best liquid funds to invest in India?

Where do you park surplus funds for a short period of time?

The probable answer to this question would be a bank account wherein you can easily save your money on a short term basis before you allocate your savings to other fruitful avenues.  However, bank accounts might not always be a smart choice because of the returns that they give. If you have a current account, the interest rate is zero and your money does not earn any return for the time it is saved in the account. Saving accounts, however, do yield interest which usually ranges from 3% to 6%. But what if you can get higher returns?

Liquid mutual funds are an ideal solution for parking your money for a short time. Liquid fund investments are debt mutual funds which have a low-risk profile and a short-term investment horizon. Liquid mutual funds invest in securities which have a maturity period of up to 91 days thereby giving you an avenue for short-term investments. They have high liquidity, very low volatility, low credit risk and no exit load. You can redeem your investments any time from the online liquid fund and get access to funds whenever you want.

Liquid fund investments are ideal for investing your emergency funds and when choosing an online liquid fund, you should be careful. The following factors should be taken into consideration when picking the best liquid mutual fund for your personal finance needs –

  1. The AUM of the fund

The AUM (Assets under Management) of the fund plays a very crucial role in determining which liquid fund investment you should choose. The larger the AUM of the fund the better diversification the fund would offer. This would diversify the risks and offer better returns. Moreover, if the AUM is large, the returns would not be impacted considerably if a large number of investors redeem their investments at the same time. It is because if there is a redemption pressure, the scheme would have to liquidate its holdings prematurely and suffer a penalty. This penalty would impact the returns generated. When the AUM is large, the impact of the penalty would be spread over a larger fund and the returns would not be impacted greatly. So, choose a scheme with a large AUM.

  1. The expense ratio

Another important consideration is the expense ratio. The lower the expense ratio of the fund the better would be the returns. So, compare the available online liquid funds and choose one which has a lower expense ratio for better returns.

  1. Check the asset allocation

Even though liquid funds invest in debt instruments, the asset allocation of the fund should be checked. You should opt for a fund which has a diversified portfolio. The portfolio holding of the scheme should not be concentrated in a few securities. It should be diversified across a range of securities whether they are treasury bills, commercial papers or certificates of deposits. Moreover, the portfolio should invest majorly in high-rated credit securities. Look for ratings of AAA or A1+ as they denote credit quality of underlying assets.

  1. The fund house

When selecting liquid fund investments, always choose reputed and large fund houses. This is because such fund houses have their reputation to take care of and they take on the responsibility of offering the best returns from their liquid funds. Large fund houses are also expected to have a larger AUM which is important when selecting online liquid funds.

All in all, the AUM, the fund house, the expense ratio and the asset allocation of the fund should be given careful consideration when choosing liquid funds for personal finance. Returns, though a factor, are not the only qualifying criterion. There is not much of a difference in returns among different liquid funds. So, returns should be checked but other factors should also be given priority. 

To make things easier, here are some of the best liquid funds which you can choose for your personal finance needs –

Name of the fundAUM as on 30th June 2020Expense Ratio as on 30th June 2020Portfolio Allocation (credit quality) as on 30th June 20203-year returns as on 5th August 20205-year returns as on 5th August 2020
HDFC Liquid FundRs.99,867 crores0.2%A1+ – 46.09%SOV – 35.94%AAA – 4.7%6.49%6.88%
SBI Liquid FundRs.50,762 crores0.18%SOV – 65.55%A1+ – 48%6.52%6.88%
Aditya Birla Sun Life Liquid FundRs.36,679 crores0.21%A1+ – 58.48%SOV – 28.59%AAA – 13.07%6.68%7.02%
Kotak Liquid FundRs.36,040 crores0.2%A1+ – 47.65%SOV – 31.09%AAA – 12.58%6.49%6.87%
Nippon India Liquid FundRs.30,604 crores0.19%A1+ – 55.81%SOV – 45.17%AAA – 1.72%6.68%7.01%


Choose any of these funds and invest your money in the best avenue for a short term period.


Published by Nidhi Mehra

I am blogger with 5 years of experience in writing articles and topics related to finance and funds

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