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Top 10 Best Liquid Funds To Invest In 2021

Picking the right Liquid Mutual Funds can be hard. We help you learn more about how liquid funds work and see a list of the best liquid funds in India for 2021.
December 15, 2020

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[Updated on 01-02-2021]

Before we talk about liquid funds, it’s important to note that traditional investment options like bank fixed deposits or savings accounts have been generating less than stellar returns for the past 5 years. 

As a result, Indian investors are turning to other investments like mutual funds for wealth creation. The consensus is that mutual funds can be a great instrument for long term wealth creation. 

However, there is a short term mutual fund option called a liquid fund that can be both better than traditional bank savings account or FD and is safer than other mutual funds.

In this blog, we’ll explore liquid funds and look at the 10 best liquid funds for 2021. These are the top liquid funds currently being recommended by Cube’s mutual fund advisor, Wealth First.

Note: For the latest funds download the Cube Wealth App.

What Are Liquid Funds?

A liquid fund is a type of debt fund that invests in short term securities like Corporate Bonds, Treasury Bills, Commercial Paper, Debentures, and more.

Liquid funds are considered to be one of the safest mutual funds because of the short maturity period (91 days). Not only that, the fund manager invests your money in the best possible debt instruments. 

Top 10 Liquid Funds In India For 2021

These are the 10 best liquid funds currently being recommended by our advisor, Wealth First. 

 

Fund Name

3 Year Returns

5 Year Returns

AUM (in Cr)

Nippon India Liquid Fund

6.22%

6.61%

₹23,106 

SBI Liquid Fund

6.08%

6.49%

₹54,433

HDFC Liquid Fund

6.04%

6.46%

₹65,240

Invesco India Liquid Fund

6.07%

6.53%

₹6,601

Axis Liquid Fund

6.21%

6.61%

₹27,868

ICICI Prudential Liquid Fund

6.17%

6.58%

₹46,016

IDFC Arbitrage Fund

5.37%

5.66%

₹7,084

Principal Cash Management Fund

2.76%

4.53%

₹239

PGIM India Insta Cash Fund

6.21%

6.62%

₹902

Edelweiss Liquid Fund

6.13%

6.37%

₹1,113


*Note: Facts & figures are as of 15-12-2020. While we update our blogs regularly, download the Cube Wealth app for the latest information on liquid funds.

Consult a wealth coach before investing in any mutual fund or download the Cube Wealth app today to know more.

5 Benefits of Investing In Liquid Funds

1. High Liquidity: Easy To Withdraw

2. Low Investment Cost: No exit load after 7 days

3. Low Risk: Maturity period of 91 days

4. Better Than FDs: Returns of 4-8%

5. Low Minimum Investment Amount: ₹1000 on Cube Wealth

Who Should Invest In Liquid Funds?

Any Indian with an Indian bank account can invest in liquid funds after KYC formalities. But whether or not you should invest in liquid funds must be based on your goals, age, risk appetite, etc.

Generally, investors prefer to invest in liquid funds for the short term. The main objective of a liquid fund is to preserve capital and deliver high liquidity.

This makes liquid funds a great place to park surplus money for short term needs or emergencies. Investors prefer to invest in liquid funds for other reasons as well. 

The dividends that you receive from a liquid fund are non-taxable. A liquid fund also offers indexation benefits. In addition, withdrawing money from a liquid fund is easy. 

Withdrawals are processed within 24 hours. Some liquid funds also offer the ‘Insta redemption’ facility. If you're using Cube, you can transfer money from your liquid funds to your bank account within minutes with Cube ATM.

Speak to a wealth coach today to know if you should invest in liquid funds.

5 Things To Consider As An Investor 

1. Investment Goals

You must understand your investment goals to know if liquid funds can add value in the short or long run. For example, if you’re an aggressive investor looking for high returns, liquid funds are not the right option. 

2. Portfolio Allocation

Your investment goals areand directly intertwined with your portfolio. Liquid funds may be suitable based on the financial health and gaps in your portfolio. 

There are two ways to know if liquid funds can add value to your portfolio:

  1. Speak to a Cube Wealth Coach
  2. Get your mutual fund portfolio analysed for free!

3. Risk tolerance

Liquid funds are widely considered to be safer than other mutual funds like equity funds and arbitrage funds. However, liquid funds still carry interest rate risk. 

Cube Wealth’s risk quiz can help you do this - it’s a simple quiz with a handful of important questions. After completing the risk quiz, you will:

  • Understand if you should invest in liquid funds
  • Get curated liquid fund recommendations

Download the Cube Wealth app to take the risk quiz and invest in the best liquid funds of 2021

4. Expense Ratio

In general, debt funds are known to have a low expense ratio. This holds true for liquid funds too since they are debt funds. A low expense ratio generally means that you’ll have to pay less when you redeem your investment.  

However, certain liquid funds charge an exit load for redemptions before 7 days. 

5. Future Potential

A liquid fund has the potential to generate better returns than your bank account or even an FD. But you must look to the future because past performance won’t matter much when you think of long term wealth creation. 

Wealth First helps you invest in liquid funds for the future based on a complex analysis of 12+ qualitative and quantitative factors. Download the Cube Wealth app to know more.  

How To Evaluate Liquid Funds?

Consulting a wealth coach is the best way to know which liquid fund is right for you. However, these are some factors that you can consider to evaluate and choose the right liquid funds:

1. Fund manager

A good fund manager with a stellar track record can help the liquid fund generate better returns (subject to market conditions). Thus, knowing the fund manager’s investing habits can help you evaluate a liquid fund. 

2. Returns

Liquid funds have been known to generate stable returns due to their low portfolio maturity period. However, seeking quality advice from experts like Wealth First can help you understand if the fund will continue to generate consistent returns in the future. 

3. Expense Ratio

A bigger expense ratio will eat into your profits. Thus, you must evaluate the expense ratio before investing in a liquid fund. 

4. Fund Size

Bigger may not necessarily be better when it comes to fund size but it’s a useful metric to look at when evaluating any mutual fund including liquid funds. 

5. Capital Gains Tax

Investors will have to pay a Short Term Capital Gains tax if liquid funds are held for less than 3 years. The tax rate is according to the investor’s tax slab. 

Furthermore, investors will have to pay a Long Term Capital Gains tax if liquid funds are held for more than 3 years. The tax rate is 20% with indexation benefits. 

Download the Cube Wealth app or Speak to a wealth coach to invest in the best liquid funds for 2021.

Cube Wealth Investment Quotes

"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen

FAQs

1. Are liquid funds better than FD?

Ans. Yes, liquid funds are better than FDs because they offer: 

  • Better returns
  • Higher liquidity
  • No lock-in period
  • Easy to buy and sell
  • Safer than other funds

Download the Cube Wealth app to invest in the best liquid funds.

2. Which is the safest liquid fund?

Ans. In general, liquid funds are considered to be the safest mutual funds. You can invest in liquid funds in a safe way using a reliable and transparent app like Cube Wealth

3. Are liquid funds good?

Ans. Liquid funds are safer than other mutual funds and better than FDs. Thus, liquid funds may be a good option based on your investment objectives.

4. Are liquid funds tax free?

Ans. Liquid funds are not tax free and are taxed just like Debt funds:

  • Short Term Capital Gains

You’ll be liable to pay taxes on gains made on liquid funds sold before 3 years. The gains are added to your annual income and taxed according to your I-T slab. 

  • Long Term Capital Gains

You’ll have to pay taxes on gains made on liquid funds sold after 3 years. The LTCG tax rate is 20% with indexation benefits. 

  • Dividend Distribution Tax

Liquid fund dividends are taxed at 29.12%. 

5. When should you invest in Liquid funds?

Ans. Liquid funds can be used when you need to park surplus money for a short period of time since the returns are better than a bank savings account.

But that’s not all, investors prefer liquid funds as a temporary pitstop in an STP. The STP amount is parked in the liquid fund and is transferred to the equity fund on the due date. 

Liquid funds can also be used for the long term since historical data suggests that these funds can generate 5-7% returns over 5+ years. Download the Cube Wealth app to invest in the best liquid funds.

Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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