How to Invest in Liquid funds with Highest Returns

Financial planning today, is no longer earning an income, and investing into a financial instrument.

It is a process that provides a framework to achieve financial goals in a systematic and planned way. It also comes with several objectives such as defining capital requirements and structuring financial policies.

It also includes optimizing financial resources to its full potential.

Amongst the various investment options that are becoming a popular choice, mutual funds schemes are becoming a popular option. Mutual funds may seem complex.

But they offer one of the most comprehensive and flexible ways to create a diversified portfolio of investments. Amongst the different types of mutual funds, lets take a look at liquid funds.

Table of Contents

What is Liquid Funds?

Money market funds also known as liquid funds, is a category of mutual funds schemes. It focuses on investing in short term debt and money market securities with maturity.

These instruments include Treasury bills (T-bills) Commercial Paper (CPs), Certificate of Deposits (CDs), Bank Term Deposits among others. This provides a reasonable return over a short period of time.

This is ideal for low-risk appetite investors who are looking to park their surplus funds over a short term.

Key Features of Liquid Funds

Lets take a look at the key features of liquid funds:

  • Short term investment:

When it comes to short term investment funds, liquid funds are an efficient financial instrument. Like any other mutual fund investment, there is no fixed guarantee of any return or principal in liquid funds. Nevertheless, the provided structure in these funds makes them a better alternative to interest earning fixed tenure financial instruments.

  • No restriction on withdrawal:

Investors can withdraw their liquid funds at any point. This can include the day after the investment date too. This would mean that investors can earn an accrual for every day of the investment.

  • TDS:

In other instruments, tax is normally deducted at the source or appliable at the time of redemption. In the case of liquid funds, there is no TDS.

  • Low Investment fees:
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Most instruments charge a withdrawal fee or premature or exit loads, if they are undertaken less than a week. In the case of liquid funds, it is no appliable. 

How Do Liquid Funds Work?

There are 2 parties involved in the working of liquid funds, lenders and borrowers.

The Lender: Borrowers don’t borrow a small amount, but a value that can run into crores. While these funds are not available through the general public, liquid funds pools money from several investors. These comprise of investors, such as yourself.

The Borrowers: These are institutes that require your funds. Private or public companies and the government are borrowers. The funds would be used for working capital requirement, infrastructural development, social growth and more. When these institutes require these funds, they issue ‘debt securities’ such as Treasury bills, Commercial Paper, Certificate of Deposits, and Bank Term Deposits amongst others.

These instruments are of the highest credit quality and carry a low default risk. Credit rating agencies assign ratings to these instruments. The known credit rating agencies in India include, CRISIL, CARE, ICRA are top credit rating agencies.

While AAA ratings are the highest, D rated ones are the lowest. The best liquid funds will only be invested in options that hold an AAA rating.

A fund manager will invest funds in a debt security issued by a borrower. Once the short-term borrowing tenure is over, the invested funds will be returned, along with an interest.

As a lender you get an interest income and a guaranteed principal on maturityWhen you invest in liquid funds, you get units as per the Net Asset Value (NAV). Since these instruments are bought and sold in the market, the NAV of liquid funds keeps on fluctuating.

But you must note, liquid funds are not completely risk free. Your investment is still subjected to interest rate risk. Any change in the dominant interest rates may cause a rise or fall in the price of the debt instruments. This in turn, can impact the return of funds, which can differ on a daily basis.

What are the things to consider before investing in liquid funds?

With any investment strategy or instrument, there are certain factors you would need to consider before investing. They include the following:

  • Fund Objectives:

Amongst all classes of debt funds, liquid funds are the least risky. The NAV doesn’t fluctuate very often, as the underlying assets have maturity period between 60 to 91 days. This prevents it from getting impacted by the underlying asset price fluctuations. However, a sudden drop in NAV can occur at any time. This occurs when there’s an abrupt decline in the credit rating of the underlying security.

  • Expected Returns
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Historically, liquid funds have provided returns in the range of 7% to 9%. This is higher than the 4 to 6% interest that a regular savings bank account offers. Although returns on liquid funds are not certain, they have delivered positive returns once reclaimed.

  • Cost

Several fees are levied on liquid funds, like all other mutual funds. This is known as an ‘expense ratio’. The Securities and Exchange Board of India (SEBI) has delegated that the expense ratio to be under 2.25%. Since the ‘hold till maturity’ strategy is normally implemented, this fund maintains a lower expense ratio, thus offering comparatively higher returns.

  • Investment Horizon

Liquid funds are best when it comes to investing surplus cash for a short duration. This helps in utilizing the full potential of underlying securities. In the event you want a longer investment horizon, you can always consider investing in ultra-short-term funds to get higher returns.

  • Financial Goals

If you want to create an emergency fund, that liquid funds are best useful. Since there is no defined lock-in period, it helps you pull out your money quickly in case of financial emergencies.

How to Invest in Liquid Funds?

The first step you need to take, is to ensure that you are mutual funds KYC compliant. You will need to update KYC documents separately for any mutual fund account. This is irrespective of your bank or broker.

To begin your investment, follow these steps:

Step 1: Sign up for a mutual fund or Demat account with your respective bank or broker. I Love & Recommend Upstox (Try it)

Step 2: Complete the required KYC formalities if needed.

Step 3: Enter all the required details

Step 4: Identify liquid funds

Step 5: Select the appropriate fund and transfer the required amount

Step 6: Issue a standing instruction if you want to invest on a monthly basis.

What are the top liquid funds with high returns?

If you are looking to invest in the best liquid funds with high returns, these are some of the options you can consider:

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HDFC Liquid Fund

  • Current Net Asset Value for HDFC Liquid Fund is Rs 4287.54 for Growth option of its Regular plan.
  • Trailing returns include:
    • 1 year – 3.12%
    • 3 years – 4.93%
    • 5 years – 5.66%
    • Since launch – 6.94%
  • Category returns include:
    • 1 year – 3.12%
    • 3 years – 4.83%
    • 5 years  – 5.59%
  • Minimum investment required is Rs 5000 and minimum additional investment is Rs 1000. Minimum SIP investment is Rs 500.

SBI Liquid Fund

  • Current Net Asset Value for is Rs 1056.5268 for IDCW Daily option of its Regular plan.
  • Trailing returns include:
    • 1 year – 3.18%
    • 3 years – 4.96%
    • 5 years – 5.7%
    • Since launch – 7.17%
  • Category returns include:
    • 1 year – 3.12%
    • 3 years – 4.84%
    • 5 years – 5.59%
  • Minimum investment required is Rs 5000 and minimum additional investment is Rs 5000. Minimum SIP investment is Rs 2000.

IDBI Liquid Fund Growth

  • Current Net Asset Value for is Rs 2235.5986 for Growth option of its Regular plan.
  • Trailing returns include:
    • 1 year – 3.34%
    • 3 years – 5.18%
    • 5 years – 5.86%
    • Since launch – 7.41%
  • Category returns include:
    • 1 year – 3.12%
    • 3 years – 4.84%
    • 5 years – 5.59%
  • Minimum investment required is Rs 5000 and minimum additional investment is Rs 1000. Minimum SIP investment is Rs 500.

Quant Liquid Plan Growth

  • Current Net Asset Value for is Rs 33.0925 for Growth option of its Regular plan.
  • Trailing returns include:
    • 1 year – 4.01%
    • 3 years – 5.61%
    • 5 years – 6.11%
    • Since launch – 7.75%
  • Category returns include:
    • 1 year – 3.12%
    • 3 years – 4.84%
    • 5 years – 5.59%
  • Minimum investment required is Rs 5000 and minimum additional investment is Rs 1000. Minimum SIP investment is Rs 1000.

Note: These data might change when you are reading this. Always Check Current Data & Returns on Google.

In order to become wealthy, you must be able to make money while you sleep.

Investing in liquid funds is one way to achieve this goal. But there are better ways, which I discuss in my Premium Course on Personal Finance

When you invest in this mutual fund scheme, your corpus will grow over time.

When selecting your funds, you should analyze the funds from different perspectives.

Always ensure that you keep your financial goal, risk appetite and investment horizon in mind.

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