What is Liquid Fund: Meaning, Benefits & How It Works

A liquid fund is a debt mutual fund that invests in short-term assets like treasury bills. It suits those who want to park money safely for a few days to months.

Ramesh gets a ₹1,00,000 bonus and needs it after three months for his child’s school fees. Instead of using a savings account, he invests in a liquid fund. After three months, the amount grows slightly, and he withdraws it easily.

Here’s how his money looks:
 

Returns from liquid funds are not fixed. They depend on short-term interest rates and market conditions.

Liquid funds suit short-term needs. They carry lower risk than stock market funds and often give better returns than savings accounts.

To understand why liquid funds are gaining popularity, let us look at how they work, who should invest in them, and what makes them different from other short-term options.

How Do Liquid Funds Work?

Liquid funds are designed to keep your money safe while offering quick access and better returns than a savings account. Here's how they work:

The main goal of a liquid fund is to protect your money and keep it easily available. The fund manager carefully chooses high-quality debt securities, like treasury bills and commercial papers, that are safe and mature quickly.

To keep the investment safe, the fund manager ensures that the average maturity of the fund’s investments is not more than 91 days. This short period makes the fund less sensitive to interest rate changes and market ups and downs.

Here’s how a liquid fund works, step by step:

1. You invest your money in the liquid fund.
    

2. The fund manager invests it in short-term, safe debt instruments.
    

3. These investments mature quickly and pay interest.
    

4. The fund earns small returns and passes them to you.
    

5. You can withdraw your money easily, usually within 1 working day.

So, liquid funds are a safe and flexible way to grow your money in the short term.

Why Should You Invest in Liquid Funds? 

Imagine you have some money that you don’t need right now, but you may need it after a week or a month. Keeping it in a savings account is safe, but it doesn’t grow much. That’s where a liquid fund helps. It’s like a smart savings option that gives you better returns without much risk.

Here’s why liquid funds are a good choice:
 

These features make liquid funds a smart choice for anyone looking to earn a bit more on idle money without taking big risks or locking it away.

Tax Rules for Liquid Mutual Funds 

Let’s learn how taxes work on liquid mutual funds, just like a teacher would explain to students. When you earn money from a liquid fund, the tax depends on how long you keep your investment.

Two Ways You Can Earn from Liquid Funds

1. Dividend Income – If the fund gives dividends, they are tax-free in your hands.
    

2. Capital Gains – If you sell the fund for more than you paid, you make a capital gain, and it is taxable.

Capital Gains Tax on Liquid Funds
 

Top Liquid Funds You Can Invest In

When choosing a liquid mutual fund, it’s important to look at past performance, risk level, returns, and how quickly you can get your money back. Here’s a table of some of the best-performing liquid funds based on simple, smart factors.
 

Let’s say Meena wants to invest ₹10,000 in a liquid mutual fund through her ICICI Bank account. She can do this easily from home using either Internet Banking or the iMobile app. Here’s how she does it:

1. Using Internet Banking

• Meena logs into her ICICI Internet Banking account.
   

• She clicks on ‘Investments and Insurance’ from the main menu.
   

• Then she selects ‘Buy Mutual Funds’.
   

• From the list shown under ‘Top Categories’, she picks a Liquid Fund, like ICICI Prudential Liquid Fund.
   

• She enters ₹10,000 as the investment amount and completes the payment.

2. Using the iMobile App

• Meena opens the iMobile App on her phone and logs in.
   

• She taps on the ‘Invest’ section and selects ‘Mutual Funds’.
   

• She chooses a suitable Liquid Fund and types in ₹10,000.
   

• She confirms and completes the investment in a few seconds.

Things to Know Before You Invest in Liquid Mutual Funds in India

Before you put your money in a liquid fund, it's good to know how it works and if it fits your needs. Let’s look at this in a simple table with easy examples.
 

Liquid funds are great for short-term savings and quick use, but they may not suit big or long-term plans. Always match the fund with your goal and comfort.

Conclusion

A liquid fund is a simple and safe way to invest your money for a short time. It lets you earn better returns than a savings account while keeping your money easy to access. It invests in short-term, low-risk instruments and helps you grow your money with low risk.

FAQ’s

1. Can liquid funds lose value?
They can, but the risk is very low for short-term holding.

2. Are returns guaranteed?
No, returns vary with market conditions but are usually stable.

3. How quickly can I withdraw?
Usually within one working day, sometimes even faster.

4. Is there any lock-in?
No, you can withdraw anytime. A small fee may apply in the first 7 days.

5. Who should use liquid funds?
Anyone needing safe parking for money for a few days to months.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?