What is a liquid fund and how does it work?

A liquid fund is a type of debt mutual fund that invests in short-term money market instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit with maturity up to 91 days. They work by pooling money from investors and investing in these low-risk securities. Returns typically range from 6-7% per annum, significantly higher than savings account rates of 2.5-4%. Liquid funds offer T+1 settlement for regular redemptions and instant redemption up to Rs 50,000.

How much return can I expect from liquid funds in 2026?

In 2026, liquid funds in India are expected to deliver returns between 6.5% to 7.5% per annum, depending on the RBI repo rate and money market conditions. This is approximately 2.5-3 times higher than typical savings account interest rates of 2.5-4%. For example, Rs 1 lakh invested for 1 year in a liquid fund at 7% would give you Rs 7,000 in returns, compared to Rs 2,500 from a savings account at 2.5%.

Are liquid funds safe? Can I lose money in liquid funds?

Liquid funds are among the safest mutual fund categories but are not 100% risk-free like bank deposits. Key safety features include: 1) SEBI regulation with strict investment guidelines, 2) Investment only in high credit quality instruments (typically AAA rated), 3) Short maturity period (max 91 days) minimizing interest rate risk, 4) Diversification across multiple securities. While rare, you can lose money if there's a default by underlying securities (like the 2019 IL&FS crisis) or sudden interest rate spikes. However, these events are uncommon, and liquid funds have historically provided stable, positive returns.

What is the tax on liquid fund returns?

Liquid fund taxation in India (as of 2026): Short-term capital gains (held less than 3 years) are added to your income and taxed at your income tax slab rate. Long-term capital gains (held 3+ years) are taxed at 20% with indexation benefit, which adjusts your purchase price for inflation, often resulting in lower effective tax. Compared to savings account interest which is fully taxable at your slab rate, liquid funds can be more tax-efficient for higher tax bracket investors, especially for longer holding periods.

Liquid fund vs savings account: Which is better?

Comparison: Returns - Liquid funds offer 6-7% vs 2.5-4% for savings accounts. Liquidity - Both offer high liquidity; liquid funds have instant redemption up to Rs 50,000, savings accounts have unlimited instant access. Safety - Savings accounts are insured up to Rs 5 lakh by DICGC; liquid funds are market-linked but very low risk. Taxation - Savings interest up to Rs 10,000 is tax-free (Section 80TTA); liquid fund gains are taxable but may be more efficient for higher brackets. Best for: Liquid funds are better for emergency funds, short-term goals, and parking surplus money. Savings accounts are better for daily transactions and small balances.

How quickly can I withdraw money from liquid funds?

Liquid fund withdrawal options: 1) Instant Redemption - Get up to Rs 50,000 or 90% of your investment (whichever is lower) credited to your bank account within minutes, available 24/7 including weekends. 2) Regular Redemption - Processed on T+1 basis, meaning you receive money the next business day after redemption request. Most AMCs process by 10 AM the next day. There are no exit loads (penalties) for withdrawing from liquid funds, making them highly flexible.

What is the minimum investment in liquid funds?

Most liquid funds in India allow investments starting from Rs 500 to Rs 1,000 as minimum initial investment. Subsequent investments (SIP or additional lump sum) can be as low as Rs 100-500 depending on the AMC. There is no maximum limit. Popular platforms like Multipl, Groww, Kuvera, and direct AMC websites allow easy investment with minimal paperwork through online KYC.

Which is better: liquid fund or FD (Fixed Deposit)?

Liquid Fund vs FD comparison: Returns - Liquid funds typically offer 6-7% vs FD rates of 5-7% (varies by bank and tenure). Liquidity - Liquid funds have no lock-in and instant withdrawal; FDs have penalties for premature withdrawal (0.5-1% reduction). Taxation - FD interest is fully taxable at slab rate; liquid funds offer indexation benefit for 3+ year holdings. Safety - FDs insured up to Rs 5 lakh; liquid funds are market-linked. Flexibility - Liquid funds allow partial withdrawal without penalty; FDs may require breaking entire deposit. Verdict: Liquid funds are better for emergency funds and short-term parking; FDs are better for guaranteed returns and specific tenure goals.

How to calculate liquid fund returns?

Liquid fund returns are calculated using compound interest formula: Final Amount = Principal × (1 + Annual Rate)^Years. For example, Rs 1,00,000 invested at 7% for 1 year = 1,00,000 × (1.07)^1 = Rs 1,07,000. For periods less than a year, use: Final Amount = Principal × (1 + Annual Rate)^(Months/12). So Rs 1,00,000 at 7% for 6 months = 1,00,000 × (1.07)^0.5 = Rs 1,03,441. To calculate extra earnings vs savings account: Extra = Liquid Fund Returns - Bank Savings Returns. At 7% vs 2.5%, your extra earnings on Rs 1 lakh for 1 year would be Rs 7,000 - Rs 2,500 = Rs 4,500.

What are the best liquid funds in India 2026?

Top liquid funds in India are typically evaluated based on: 1) Consistent returns, 2) Low expense ratio, 3) High credit quality portfolio, 4) Fund house reputation. Leading liquid funds include those from HDFC, ICICI Prudential, SBI, Axis, and Nippon India. However, since liquid funds invest in similar instruments, return differences are minimal (0.1-0.3%). Focus more on expense ratio (lower is better) and fund house credibility rather than chasing highest returns. Always check the fund's portfolio credit quality - prefer funds with 100% AAA/A1+ rated holdings.

Is liquid fund better than overnight fund?

Overnight funds invest in securities with 1-day maturity, while liquid funds invest in securities up to 91 days maturity. Comparison: Safety - Overnight funds are marginally safer due to 1-day maturity eliminating credit/interest rate risk. Returns - Liquid funds offer slightly higher returns (0.25-0.5% more annually) due to longer maturity securities. Liquidity - Both offer T+1 redemption; liquid funds also offer instant redemption up to Rs 50,000. Recommendation: Use overnight funds for extremely short parking (few days) or during market uncertainty. Use liquid funds for 1-month to 1-year horizon for better returns with minimal additional risk.

Can NRIs invest in liquid funds in India?

Yes, NRIs can invest in liquid funds in India on a repatriable or non-repatriable basis. Requirements: 1) NRE/NRO bank account in India, 2) Completed KYC with PAN card, 3) FATCA declaration. Process: Invest through NRE account for repatriable investments or NRO account for non-repatriable. Most AMCs and platforms accept NRI investments. Taxation: NRI liquid fund gains are subject to TDS - 30% for short-term gains, 20% for long-term gains. NRIs can claim credit for Indian taxes paid in their country of residence under DTAA.

Liquid Fund vs Savings Calculator

Make Your Money Work Harder

Why let your savings earn just 2.5% in a bank when liquid funds can give you 7%? See the difference in seconds.

Updated Jan 2026

Liquid Fund Avg.

2.5%

Savings Account

2.8x

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Your Investment

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Duration

Your Returns Comparison

With

Bank Savings

₹1,02,500

@ 2.5% p.a.

Earnings: ₹2,500

With
Liquid Funds
₹1,07,000
@ 7% p.a.
Earnings: ₹7,000

Your Extra Earnings with Liquid Funds

₹4,500

That's 180% more than bank savings!

What You Could Buy

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Liquid Funds vs Alternatives

Feature	Liquid Fund	Savings A/c	FD
Returns (p.a.)	6-7%	2.5-4%	5-7%
Instant Withdrawal	✓ Up to ₹50K	✓ Unlimited	✗ Penalty
Lock-in Period	✓ None	✓ None	✗ Yes
Tax Efficiency	✓ Indexation	Slab rate	Slab rate
Min Investment	₹500	₹0	₹1,000+
Risk Level	Very Low	Zero	Zero
Best For	Short-term spends, Emergency fund	Daily transactions	Long-term fixed goals

Learn About Liquid Funds

What are Liquid Funds?

Debt mutual funds investing in money market instruments (T-Bills, CPs, CDs) with maturity up to 91 days. Safest mutual fund category.

Returns: 6-7% vs 2.5% savings

Are They Safe?

Yes - SEBI regulated, invest in AAA-rated securities only, minimal interest rate risk. Not insured like FDs, but historically very stable.

Instant withdrawal up to ₹50,000

Tax on Liquid Funds

Short-term (<3 yrs): Taxed at your slab rate. Long-term (3+ yrs): 20% with indexation benefit - often more tax efficient than FD interest.

Indexation = Lower tax on long-term

Why Use Multipl?

Your spending money earns 7% in liquid funds PLUS you get discounts when spending at Swiggy, MakeMyTrip, Netflix & 100+ brands!

Higher returns + Brand discounts

SEBI & AMFI

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5,00,000+

Users

₹100Cr+

AUM

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