How to Choose Best Liquid Funds In India?

Best liquid funds are a special type of debt funds which invests in short-term papers. Best liquid funds typically invest in AAA rated papers issued by private or public companies and the government. Find out the best liquid funds in India for 2021.

List of 5 Best Liquid Funds in India for 2021

Funds	MF Rating	1 year	3 Years	5 Years	Since Inception
Mirae Asset Cash Management Fund - Growth		3.88%	5.85%	6.25%	6.47%
Edelweiss Liquid Fund - Regular Plan Growth - Growth		3.83%	5.85%	6.18%	8.03%
Baroda Liquid Fund Plan A - Growth		3.81%	5.88%	6.38%	7.32%
Hdfc Liquid Fund - Growth		3.79%	5.76%	6.24%	7.05%
L&t Liquid Fund - Regular Growth		3.89%	5.86%	6.35%	7.40%

Note: *Returns as of date 23rd February 2021

What are Best Liquid Funds?

Liquid mutual funds invest in fixed income instruments with maturity period of up to 91 days. Due to this, liquid mutual funds are least impacted with interest rate movements.

Liquid funds also invest in AAA rated papers. Hence, they carry very little credit risk. AAA rated papers are considered to be highly stable and safe. Credit risk is the risk that the borrow will not make timely interest payment or return the principal on maturity. Since liquid funds invest in AAA rated papers, they are highly safe.

High safety and superior returns are the primary reason why majority of investors are investing in best liquid funds instead of bank deposits.

Another benefit of best liquid funds is that their Net Asset Value (NAV) is calculated even on Saturdays and Sundays. So, you get maximum real price discovery.

6 Most Important Advantages of Best Liquid Funds

• Higher Returns: In the last 1-year, liquid mutual funds have generated superior returns than Bank FDs.

• High Liquidity: The most important feature of best liquid fund is Instant Liquidity. Investors can redeem their investments and the amount is credited in the account in just 1 day!

  Many fund houses have also started providing debit card for your liquid funds. So, you can redeem on a real-time basis.

• Low Risk: Liquid mutual funds invest in papers which mature in less than 91 days. Due to this, they are least affected by interest rate changes. Similarly, these papers are AAA rated papers. This means that these papers have very little chances of default.

• Lower Expense Ratios: Expense ratio and your fund returns are inversely related. Higher expense ratio means lower returns. Liquid mutual funds carry much lower expense ratio compared to debt funds. Hence, they provide superior returns.

• Higher Tax-Adjusted Returns: Liquid mutual funds follow debt taxation. So, you get the benefit of indexation which reduces your overall tax liability. Indexation helps you adjust your purchase price to inflation. The Cost Inflation Index (CII) is published every year by the Income Tax Authorities. You can find the CII list here.

  Particulars	Values
  Purchase Date	1st January 2018
  Purchase Price	10,00,000
  Sale Date	2nd January 2021
  Sale Price	14,00,000
  Years Completed	3 years
  Real Gain	4,00,000
  Original Tax Payable	80,000
  Tax Applicable	Long term Capital Gains Tax
  Tax Rate	20% with indexation
  CII 2017-18	272
  CII 2020-21	301
  New (Indexed) Purchase Price	11,06,618
  Indexed Gain	2,93,382
  Tax Payable	58,676
  Savings in Tax Payable	21,324

  As you can see, due to indexation you end up saving Rs 21,324 in taxes! This benefit is not allowed in Bank FDs. Hence, liquid funds offer higher tax adjusted returns. But indexation benefit is only provided when your investment has completed 3 years.

• Minimum Exit Load: Exit load is the penalty charged by fund houses on early redemption. Liquid mutual funds have an exit load period of only 7 days. This means that your money is locked-in for only 7 days. Post 7 days, you can freely withdraw your money.

  You can also redeem before 7 days. But marginal exit load penalty will be applicable. Let us understand this with the below calculations.

  TATA Liquid fund is one of the best liquid funds in India. Here is the exit load calculation for the fund.

  Exit Load %	Redemption Within	Exit Load on Rs 1 Lakh
  0.0070%	1 Day	Rs 7.00
  0.0065%	2 Days	Rs 6.50
  0.0060%	3 Days	Rs 6.00
  0.0055%	4 Days	Rs 5.50
  0.0050%	5 Days	Rs 5.00
  0.0045%	6 Days	Rs 4.50
  0.0000%	7 Days	Rs 0.00

  As you can see, the exit load payable on Rs 1 Lakh is only Rs 7. Much lower than the 1% penalty charged by banks on early FD withdrawal. Hence Liquid funds are the best investment options for short-term goals.

How are Best Liquid Funds Taxed?

Liquid funds are a type of debt funds. Hence, they follow debt taxation. The holding period for liquid funds is 36 months or 3 years.

• If you redeem before 3 years, then short-term capital gains tax is applicable. Your gains will be added to your income and taxed as per the applicable tax slab.
• If you redeem after 3 years, then long-term capital gains tax is applicable. A flat 20% with indexation tax will be applicable.

As we saw above, indexation helps you reduce your tax outgo substantially.

Who Should Invest in Best Liquid Funds?

• Best liquid funds are perfect for medium or even high risk investors looking to park surplus cash for a short period.
• Low risk investors with short-term financial goals can also invest in the best liquid funds for safety and higher returns.
• Retirees or senior citizens can also consider investing in best liquid funds as they offer higher liquidity. Majority of schemes for senior citizens or retirees like Senior Citizens Saving Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY) carry 5+years lock-in period. These investments carry very high penalties on premature withdrawal. In such cases, investing in best liquid funds is the best option.

Best Liquid Fund #1: Aditya Birla Sun Life Liquid Fund – Growth

How to Invest in Best Liquid Fund?

Investing in the best liquid funds is now absolutely FREE. Open a FREE RankMF account and invest in any of the above mentioned best liquid fund.

To create a FREE RankMF account:

Visit www.rankmf.com and click on register.

• Mention your basic details and complete your enrolment formalities.
• Verify your details using Aadhaar based OTP and signature system.
• Select any one of the best liquid funds and simply invest!
• You can start investing with as little as Rs 500 via SIP or lumpsum mode.