A liquid fund is a debt fund that invests in short-term money market securities which aims to generate income on a regular basis. As the name suggests liquid funds are highly liquid investments which means they can be easily redeemed, even instantly within the day, with very little cost to the investor. Investors who wish to park their money for short-term goals, such as for an emergency fund, while maintaining liquidity should look at investing in liquid funds.
Type of Investments
Liquid funds invest in highly rated, short-term debt and money market instruments such as commercial papers (CPs), certificates of deposit (CDs), treasury bills (T-bills), etc. with residual maturity of up to 91 days. Additionally, as per regulations, liquid funds are required to invest a minimum of 20% in liquid assets such as cash, government securities, T-bills and repo on government securities.
Since they invest in short-term debt instruments with a residual maturity of upto 91 days, these funds are relatively less volatile to interest rate changes as interest rates largely remain stable in the short-term.
Investment Cut-Off Timing
In any type of mutual fund investment the cut-off timing plays an important role in purchase as well as redemption as it determines the NAV (Net Asset Value) that will be applicable on the purchase/redemption amount. In case of liquid funds, the cut-off timing is 1:30pm IST (the timings have been revised due to COVID-19 situation i.e. 12:30pm for investment and 1:00pm for redemption IST) for both investment and redemption. The applicable NAV could be of the previous day or of the same day based on the time at which the transaction request is submitted and received. If the request is received by the fund house before 1:30pm, previous day’s NAV will be applicable and if it is received after 1:30pm, NAV of the same day will be applicable.
Exit Load
The instant redemption facility where the redemption amount is received on the same day makes this category of fund highly liquid. At the same time, it comes with an exit load that an investor has to pay only on the redeemed amount. Liquid funds do not charge any exit load on redemption requests made seven days from the date of investment. But for the period prior to that, exit load on liquid fund charged is as below:
| Investor exit upon subscription | Exit load as a % of redemption amount |
| Day 1 | 0.0070 |
| Day 2 | 0.0065 |
| Day 3 | 0.0060 |
| Day 4 | 0.0055 |
| Day 5 | 0.0050 |
| Day 6 | 0.0045 |
| Day 7 onwards | NIL |
When it comes to investing in a liquid fund the procedure remains the same just like any other mutual fund investment. Investor needs to create a folio with the fund with which he/she is willing to invest. The investor needs to be KYC (Know Your Customer) compliant. Investors can then choose a liquid fund under either the growth or dividend plan option. Under the dividend plan option, investors can opt for reinvestment or payout options to be made on a daily, weekly, monthly, quarterly, annual frequency, among others. It must be noted that these frequencies vary across funds.
Almost like a Bank Account
Instead of leaving money idle in a bank account, investors can look at parking that money in a liquid fund. Essentially, investing in a liquid fund is almost like putting money aside in a bank account, but at a slightly higher interest rate. However, this higher interest rate comes with some risk depending on the instruments the funds invests in. Since CPs, CDs, T-Bills, etc, are high quality short-term papers, the risk in liquid funds is relatively lower compared to other debt mutual fund products. Therefore, lower risk, along with low interest rate sensitivity, makes liquid funds an ideal candidate for meeting near-term to short-term financial needs.