The Reserve Bank of India had, more than 2 years ago, deregulated the interest rates on savings deposits. However, this good news is restricted to paper only as 90% of the banks still offer a meager 4% compared to higher returns from top liquid funds.
There are a few banks which offer a higher interest rate on savings accounts but they usually ask for a high minimum deposit.
However, all these do not deter most of us from depositing a significant portion of our excess cash in the low-yielding bank savings accounts which eventually earns lower interest rates than the prevailing rate of inflation.
There are better options available like mutual funds for maintaining cash..
Liquid funds or money market funds can help us earn a much higher interest rate compared to the savings bank accounts without compromising on how quickly we can get real access to the cash.
If you want to know more about liquid funds, then continue reading after the below list of the best liquid funds. I have tried to explain in detail for your understanding…
TOP 5 BEST LIQUID FUNDS IN INDIA
Here is a list of the top 5 liquid mutual funds in India. These rankings have been arrived after consideration of a few essential parameters like
- The highest returns received in the last 3 years.
- Funds that are rated #1-3 by CRISIL
- Assets under Management or AUM > 1000 crores.
|CRISIL Rank||Name||AUM||1mnth||3mnth||6mnth||1yr||3 yr|
|3||SBI Premier Liquid – RP (G)||5666.65||0.7||2.1||4.2||8.7||9.0|
|1||ICICI Pru Money Market Fund (G)||1922.00||0.6||2.0||4.2||8.8||9.0|
|1||DSP-BR Liquidity Fund – IP (G)||2450.45||0.6||1.9||4.2||8.8||9.0|
|1||JP Morgan Liquid SIP (G)||1110.61||0.6||2.0||4.2||8.8||9.1|
|2||HDFC Liquid Fund (G)||9437.68||0.6||2.0||4.2||8.8||9.1|
- SBI Premier Liquid Fund
The SBI Premier Liquid Fund (Regular) is an open-ended scheme which was launched on March 23, 2007. The minimum investment is Rs 50,000 and last dividend amount was Rs 2.85 (as on April 06, 2008). It has changed the face value per unit from Rs 10/unit to Rs 1000/unit. It was earlier known as SBI Magnum Institutional Income – Savings Plan.
- ICICI Pru Money Market Fund
It is an open-ended money market fund that offers rewarding parking facility for short-term cash which is remaining idle. The cash can be withdrawn as and when required and it proves to be an investment through its earnings. The product is suitable for investors who are looking forward to short-term savings solution. It offers a low-risk option to invest in mutual funds. It has a high level of liquidity and offers the flexibility of cash access just when you need it. The application amount is set at Rs 5000 (additions in multiples of Re 1) and the minimum additional investment is Rs 1000 (additions in multiples of Re 1). There is no entry or exit load. The minimum redemption amount is Rs 500 (plus in multiples of Re 1). Systematic Investment Plan is now available on this plan.
- DSP-BR Liquidity Fund
The DSP-BR Liquidity Fund is one of the better performing liquid mutual funds in India. It is an Open Ended Scheme that helps to generate a reasonable return with very low risk but high degree of liquidity. The minimum investment amount is Rs 5000 . The scheme has been ranked #1 in the Liquid category by CRISIL and the rank has remained unchanged from the quarter ending December, 2014. My suggestion is that those of you who have already invested in this scheme should stay invested.
- JP Morgan Liquid SIP
The main objective of the JP Morgan Liquid SIP Plan is to afford reasonable returns coupled with low risk and very high level of liquidity through the portfolio of debt securities and money market. It is an open ended scheme and was launched way back in September, 2008. The minimum investment amount is Rs 10,000. The scheme has been ranked # 1 in the Liquid category by CRISIL and this is a huge improvement from the last quarter (Dec, 2014) where it was ranked No. 4.
- HDFC Liquid Fund
The primary objective of the scheme is to enhance the income and is consistent with high level of liquidity. It was launched in 2000 and is an Open Ended High Liquidity Income Scheme. The Dividend Plan offers Daily Dividend option with reinvestment facility. The weekly and monthly Dividend option has payout and reinvestment facility. There is no entry or exit load. The redemption proceeds are normally dispatched with 1 business day. The product is very much suitable for those investors who are seeking good income over a short term and who are looking for investments in the money market and debt instruments.
What is a Liquid Fund?
Liquid fund is a special category of mutual fund that invests primarily in various forms of money market instruments such as term deposits, commercial papers and certificate of deposits.
The underlying assets of these liquid funds have a lower maturity period (usually less than 91 days) which helps the fund manager meet the redemption demand of the investors and hence maintaining liquidity.
In fact, liquid funds and debt funds easily contribute more than 70% of entire mutual fund AUM in India. Currently the AUM of liquid funds is more than Rs 3 lakh crores.
Wikipedia article – What is a money market fund
‘Lock-in’ period for Liquid mutual Funds?
The majority of the funds have a lock-in period for a maximum of 3 days to give protection against banking glitches and redemption proceeds are offered within 24 hours.
However, there are some other funds which have a lock-in period of a week or even a month. But the tenure is always less than a conventional mutual fund. Hey, remember, the primary aim of using a liquid mutual fund is liquidity and better interest than savings account from banks.
Expense ratio of liquid funds
The management expense ratio for mutual funds vary between 1.5-3% for normal mutual funds. However, for liquid mutual funds it is typically 0.6-1%.
As you can see, liquid mutual funds have very low expense ratio. Expense ratio is nothing but amount charged by the fund house for managing your investments.
Benefits of liquid funds
- Nowadays the majority of the liquid mutual funds have no lock-in period.
- The withdrawals from these funds are processed within 24 hours (business days). The cut-off time for the withdrawals is set at 2 pm which basically means if a redemption request is made within 2 pm on a business day then the funds will get credited to your bank account within the next business day by 10 am.
- The liquid mutual funds enjoy the lowest rate of interest among all debt funds as it is primarily invested in fixed income securities with short maturity.
- There are no entry and exit loads for liquid mutual funds usually.
Tax Structure of Liquid Funds
If you are investing in a short-term fixed deposit then the returns will be taxable as per your tax bracket. This means that if you are in the highest slab of taxes then the majority of the returns from the fixed deposit would be gone.
But if you choose dividend option for the liquid funds then the returns will be free from any kind of tax. This is because liquid mutual funds already pay around 28.325% as dividend distribution tax. So you don’t need to pay any tax from your end if you choose dividend option.
If you choose growth option, then you will need to pay short term capital gains tax at 11.26% for holding less than 1 year. If held for more than a year, the tax rate comes to 22.2% with indexation benefits.
But if you choose a bank deposit, then the interest on your deposit will be taxed as per your income tax slab. Hence liquid fund is a very attractive option for people especially in high tax bracket(30%).
The returns from liquid funds
The good news is that in the past one year, some of the liquid funds have managed to offer equal or higher returns than the bank fixed deposits. However, unlike liquid funds, banks impose a penalty for premature withdrawal.
Why liquid funds have higher return?
Liquid funds are said to be very good short-term investment options in a high inflation environment. During a period of inflation, the Reserve Bank will keep the interest rates high and tighten the liquidity and thereby help the liquid funds earn good returns.
Usually liquid mutual funds do not trade and only hold ultra-short term securities until their maturity. This means there is no daily fluctuation of underlying market instruments.
So this helps in reducing volatility. Also, the underlying securities (read ‘borrowers’) usually use this money for short term needs and return it very quick. If not, this will affect their credit rating.
Note: Though liquid funds are largely stable, it is not guaranteed or assured return like fixed deposits.
Choosing a liquid/money market fund and who uses them most
The returns from the liquid funds do not vary greatly as their funds get invested in similar underlying securities. Never consider the past returns only when you are looking for a liquid fund.
The other factors like quality of credit of the underlying securities, the size of the fund and the track record of the fund house might also be taken into account .This is because there is no great difference in underlying assets of most funds.
Liquid funds are used by large institutions to park their short term money. However, it should not discourage individual investors from making use of these money market funds to earn above average returns compared to inflation .
We have already given our opinion on what we think are good funds above to help you protect from inflation.
Different liquid funds type and how to choose them
The liquid mutual funds are available in different plans such as weekly dividend plans, monthly dividend plans and growth plans. It is interesting to note that there is no dividend in growth plans and fund appreciation is reflected in higher unit value.
The investors are free to choose the plan as per liquidity needs. The retail investors are encouraged to invest in direct plans because of the lower expense ratio which helps in securing a higher return.
Case 1: If you received lump-sum money and confused where to invest. In this case, better to choose the growth option of liquid funds split between 2-3 good liquid funds until you decide on the final investment avenue.
Case 2: You’re an aged investor and depend on regular income from your investments. Choose dividend option for the highly liquid part of your portfolio. This will provide a constant stream of cash flow.
Case 3: You have an emergency fund and disappointed with savings account interest? Growth option of liquid fund is an option. Because sometimes, you may not use your emergency fund for years. Always keep one-two month expenses in bank account and park remaining in liquid funds.
Disclosure: I have two month expenses in my bank account. Remaining 3 months of my emergency money fund and cash proceeds/sales marked for investments, re-investments are divided among growth option of two liquid funds ie., ICICI Prudential Money Market, HDFC Liquid Fund.
Past Performance of liquid funds
The performance of the liquid funds in the last one year has been pretty impressive with returns being registered between 7.70 to 8.85%. The banks are also showing greater interest in liquid funds as there is a high degree of safety in liquid mutual funds.
The AUM of Liquid Mutual Funds market in India is on an upswing and these best 5 liquid mutual funds only provide great liquidity for the investors.
Retail investors must make use of liquid funds for storing their emergency cash fund or parking cash of planned investments until they decide where to invest sensibly.
Standard Disclaimer: I’m not a SEBI registered investment advisor and above should not be considered as buy/sell advice and must be considered only for research/education purpose. Please do due analysis before acting/investing and consult your professional financial advisor .
Smartmoneygoal.in does not receive any compensation in any form from any funds/stocks discussed in this website. So let us know if you like our personal review of top 5 best liquid funds in India with your comments. Also ask any doubts if you have.