Liquid Funds are gaining popularity due to it’s safety, returns and tax benefits. However, many of us confused in choosing the right funds. Hence, in this post, let us discuss about the Top 5 Best Liquid Mutual Funds in India in 2018.
Liquid fund is a type mutual fund that invests money in Bank Certificate of Deposits, Bank Fixed Deposits, Treasury Bills, Bill Rediscounting, Commercial Paper, Collateralised Borrowing & Lending Obligation and other debt securities with maturities up to 91 days.
The NAV of the funds is computed for 365 days, unlike other debt mutual funds where NAV is computed for business days only.
In the case of other debt funds for purchase applications received within the cut-off time (3.00 P.M) having the value up to Rs.2 lakhs, the NAV as at the end of the day of the application is applied. For applications of more than Rs.2 lakhs, within the cut-off time (i.e. 3.00 P.M.) the allotment of units is subject to realization of funds.
However, in the case of liquid funds, for all transactions (irrespective of the value of an investment) received within the cut-off time (i.e. up to 2.00 P.M.) where money is also realized within the cut-off time, the units are allotted as per previous day NAV.
Let us say if a purchase transaction in a liquid fund is submitted on Monday before 2.00 P.M. and amount is also realised by 2.00 P.M. on Monday, then NAV of Sunday is applicable.
Similarly, when redemption request is submitted before cut-off time on Friday, then applicable NAV for redemption is of Sunday, i.e. the day before the next business day. This means, your investments generate returns for every single day of investment.
The popular theory is that park your IDLE money in liquid funds. However, you must understand for how long the money be IDLE. Based on that time horizon you have to take a call. Idle money of one day is different than idle money of 1 year.
Few suggest that we must use liquid funds to keep our emergency fund. But in my view, liquid funds or not so liquid in nature. Because if you request for redemption (before cut-off time), then the money will be credited on the next working day.
Nowadays there is an option of instant redemption. Under this option, you can redeem instantly up to Rs.50,000 per day per folio. This has given some liquidity benefit. However, if your requirement is more than Rs.50,000 then you have to wait for next day.
Few funds offer you the card for withdrawal but there are certain withdrawal restrictions.
Hence, my suggestion is to park your PART of emergency fund in liquid funds rather than parking all 100% into liquid funds.
However, the best idea to utilize liquid funds is to invest for your short-term goals. You can expect a better return than your savings account (4%). Some funds generated around 8% to 9% and some funds around 5%. But we assume liquid funds generate higher than your savings account.
As the liquid funds invest in low maturity papers, the volatility is very less. Also, they invest in high credit rated papers (higher than AA rated), so the default risk is also very minimal.
Hence, you may say the highest safety, more expectation than your savings account are the primary reasons for investing in liquid funds.
Liquid funds are treated like other debt funds for taxation purpose. If you hold the fund for less than 3 years, then it is considered as Short Term Capital Gain (STCG). However, if you are holding for more than 3 years, then it is considered as Long Term Capital Gain (LTCG).
Short Term Capital Gain Tax for Debt Funds-It will be taxed as per your tax slab.
Long Term Capital Gain Tax For Debt Funds-It will be taxed at 20% with indexation benefit.
I will try to explain the same from below pictures.
Hope you got the clarity about the taxation classification. Now let us understand the rate of tax.
Refer the complete Tax Benefit of Mutual Funds in my earlier post “Budget 2018 – Mutual Fund Taxation FY 2018-19“.
As I said above, all liquid funds invest in debt papers which mature in less than 91 days. However, few funds take the risk by investing in low rated funds for the sake of generating high returns. Hence, I went through each fund portfolio.
Again, the best way I suggest to invest in the liquid fund is in same AMCs funds where you already investing in equity funds or you already have online access or folio number already generated. Because the difference of returns among the funds is very less.
But as I said above, I shortlisted the liquid funds based on the below criteria.
I selected the direct funds for the sake of my comparison and tried to list the expense ratio of all these liquid funds. Because expense ratio also matters when it comes to return on investment.
I select the fund which shows category average maturity. All liquid funds invest in the papers which mature within 91 days. Lower the maturity means the fund is holding more cash which in return gives me less return. Hence, I avoid the fund which show lower average maturity.
For example, IIFL Liquid Fund-Direct-Growth average maturity is 0.08. Hence, it indicates that the fund is holding the cash highly. I will not touch such funds.
My concentration is to select the funds which are holding 100% AAA rated funds rather than the funds which to a certain extent holding AA rated or unrated papers.
Modified duration is again the indication of the volatility of the fund. Hence, I choose the fund which is low in modified duration.
We look at liquid funds mainly for safety than anything else. Also, our expectation from such funds should be always to get more than savings account returns. Hence, I don’t think 1% or less than 1% returns matters to us.
Hence, I overlook the return part and consider only on quality and safety.
Based on the above assumptions, I have shortlisted Top 5 Best Liquid Mutual Funds in India in 2018. Remember that this is not the FINAL best liquid funds list. Also, as I pointed already, my priority is for highest safety than return. Hence, even though few funds performing well, I may be ignored and you may point that as I am bit BIASED. Two reasons for that may be. One is these funds holding average credit rating as AA or unrated papers and the second thing I may be biased towards fund houses.
Below is the list of Top 5 Best Liquid Mutual Funds in India in 2018 I have selected (marked with green color).
If you find the ratings of these funds in valueresearch, then you find that all these are rated less than 5 or 4 rated. The reason is, the 5 and 4 star rated funds average credit rating is AA or they may be holding some % of AA rated papers, which I completely avoided for selection.
Hope my above methodology and the funds’ selection will help you in short listing the Top 5 Best Liquid Mutual Funds in India in 2018.
Refer my earlier posts related to Mutual Fund Investment in 2018-19
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View Comments
Hi Basu,
For short-term investment (say 1-2 years) in a liquid find, shall I go for lump sum or opt for STP if the investment amount is high (for example, 5 lacs)?
Dear Mahesh,
Go for lump sum.
Hi Basu,
Thank you for the suggestion!
Hi im new to investment into mutual fund dont hav much idea i would like to invest Rs 5000 in SIP for perioid of 10-15 years currently im of age 28 so which would be the ideal funds to invest?
If you could plse suggest me.
Dear Jojo,
Refer my post "Top 10 Best SIP Mutual Funds to invest in India in 2019".
Can you help me in mf investment
I have an mf in uti 2500 per month
Uti transport n logistics fund-500
Uti mid cap-1000
Uti value opportunity fund-1000
Its been since 2017 im investing all equity allocation i think
Kindly advise should i continue
Dear Oommen,
It is hard for me to suggest anything BLINDLY (without knowing the details of your financial goal, time horizon and like what asset allocation you are following).
My time horizon is 10-15 years and financial goal is 3-4 crs by that time and current mf allocated is 100%equity
Plse advise im correctly invested?
Dear Oomen,
First read the above post properly. Whether your goal is 5 years or 50 years away, the first task you have to do is asset allocation between debt and equity.
Please suggest me as per my current protfolio what changes to be made?
Dear Oommen,
I already suggested the things to do.
Hello Basavaraj,
Any plans on coming up with 2019 best liquid funds one can look at?
I had started with "Aditya Birla Sun Life Liquid Fund" and "RELIANCE LIQUID FUND" ..
Not sure if these are in the top list..
Regards,
Munna
Dear Munna,
I will write on this soon. You can continue the both as of now.
Waiting for ur recommendations about best Liquid MFs for 2019 !
Dear Albin,
Sure :)
Please suggest your Top 5 Liquid Debt Funds in 2021
Dear Anil,
You can use Quantum or Parag Parikh Liquid Funds.
Hi Basu,
Thanks for this. Quick one : how to find Credit Quality? Any site from wherein we can get these % across paper types? Checked VR and Morningstar couldn't find it !
Gagan,
Better to check the factsheet of the fund in respective AMC portals.
Hi Basu
Planning to invest 2 lac for my daughters education lump sum, shall I put in Liquid fund and then STP /SIP ?
Time horizon is 8 years (she is in 5th grade)
I have adequate Insurance cover, Debt(LIC/FD/PPF)
My Funds as follows SIP
Franklin Ultra short -5k
Franklin prima plus-2k
HDFC- Hybrid balanced -10k
So kindly advice shall I park my 2 lac lump sum in Any of the above fund or Liquid fund and STP route?
Is my funds ok(courtesy BasuNivesh Q&A)
Thanks many
Dear Saleem,
I am not sure what portion of debt is there. Hence, I would suggest around 60:40 between debt and equity. For debt, use Ultra Short Term Term Debt Fund (in one go) and for equity one large cap (stagger your investment for another 6 months). Two funds are enough for you.
many many thanks
Happy New Year to you and all your readers!!
Dear Saleem,
Thanks and wishing you the same.
Hello Sir,
I am planing to invest in Mutual funds or SIP for the Long term (10 to 15 yrs), right now i am investing in EPF 5000/ Month. Now I want to invest another 5000 per month for (10 to 15 yrs) in Mutual funds or SIP, I have read your blog regarding this then i after i have chosen below funds, Please suggest i am on right track or not or need to change amount ratio with other plan or other things.
1. SBI Blue chip fund-Direct growth :2000
2. HDFC Midcap Opp Fund(G) :2000
3. Mirae Asset Emerging blue chip-Direct Plan :1000
Thanks
Amit
Dear Amit,
How you arrived at these funds? Because few may not be my recommendations. Hence, don't say you selected based on my views. Also, let me know what asset allocation you are following between debt and equity.
Thanks a lot for your response!
I mean, I have selected these funds on the basis of read some blog on your site as well as on another platform. Then after i have selected these funds.
I want to invest debt and equity as ratio 40:60 my over all investment for the month is 10K for the long term 10 to 15 years.
I am new in this field, i don't know i am going in the right direction or not. So please suggest which fund will better for me and what ratio need to invest in those funds. Also i want to invest directly(my self) through online platform.
Thanks
Amit
Dear Amit,
Go ahead but with proper debt and equity asset allocation.
Dear Basu ji
I want to invest another 10000 as sip. Interested in doing it directly.I am already investing 14000 through karvy in different mutual funds. They are -:
Birla snlfe midcap fund -3k
Mirae asset emerging bluechip fund - 4000
L&t india value fund - 4000
Icici prudential bnkig & finance service fund - 3000
Time 10 yrs for child education.
Pls guide.
Dear Manish,
How you selected these funds?
Dear Basu ji
I have started investing in Axis long term Equity – Regular Plan in Nov 2015. Suppose if i make STP to Axis long term Equity – Direct Plan from Dec 2018, Whether the same will be considered for Tax deduction u/s 80c? Can you please clarify. Thanks in advance.
Dear Prakash,
You mean to say each month lock-free units again re-invested in same fund direct fund right? If this is what is your plan, then yes your direct fund investment is eligible for Sec.80C.
Dear basu ji,
Yes, The unlocked units of Nov 2015 (regular plan) will be invested in ALTE fund Direct Plan for Dec 2018 through STP.
Thanks for your swift reply.
where are you seeing the credit rating of the holding instruments of any liquid fund? When I see (for example of axis liquid fund direct growth) in either value research, economic times, or money control or any random website related to mutual funds, I am seeing either top holdings with A1+ rating or all holdings without any rating? You said axis liquid fund direct has holdings with AA ratings, but where can I see such ratings?
Dear Radhakrishna,
You can refer Morningstar.