Top 5 Liquid mutual funds for short term investment

Top 5 mutual funds for short term investment-Jan-2013Top 5 Liquid mutual funds for short term investment

If you want to park your surplus money for a short term period and get higher returns, you can opt for Liquid Mutual funds.

What are liquid mutual funds?

Liquid mutual funds are similar to debt funds but invest in very short term investments which are maturing within 90 days. Liquid mutual funds invest in debt instruments, money market instruments, government bills, government securities which matures before 90 days period.

Features of Liquid mutual funds

  1. These liquid mutual funds invest in short term instruments which gets matured in less than 90 days.
  2. There is no exit load for liquid mutual funds.
  3. Dividend distribution tax of 27% is applicable on returns.
  4. The returns on liquid mutual funds would be higher when interest rates are falling as short term securities interest rates would increase.
  5. The last 3 years returns on Top 5 mutual funds are ranging between 8% to 9.6% p.a.
  6. Like any other mutual fund, liquid mutual funds are available as growth fund and dividend fund. However in Dividend fund, you can re-invest your dividend and you would get fund units to that extent.

Liquid fund Vs Bank Savings Account

Though there are similar features of liquid mutual fund and bank savings account, below are some of the differences.

  1. Returns: Liquid mutual funds returns are ranging between 8% to 9.5% p.a, whereas the bank savings bank account the interest rates are ranging between 4% to 6% (highest interest is offered by a few banks only).
  2. Tax: Returns on liquid funds are attracted by dividend distribution tax of 27% p.a. and they are deducted directly by mutual fund company. However savings bank account, income tax would depend on the individual tax bracket, though banks may directly deduct the tax as per their applicable rates.

Liquid funds Vs Ultra Short term mutual funds

  1. Investment objectives: The objective of liquid mutual funds is to invest in short term investments of < 90 days. However ultra short term mutual funds invest in securities which gets matured beyond 90 days.
  2. Underlying securities trading: Liquid funds invest in less than 90 days securities and the NAV of such fund would get increased when the interest are received. Ultra short term funds on other hand invest in  greater than 90 days securities and such underlying securities would be trading in the market. There are good chances that the NAV of ultra short term fund fluctuates due to underlying securities getting traded in open market.
  3. Exit load: Liquid funds do not have exit load, whereas Ultra short term funds have exit load if withdrawn before 1 month. Some ultra short term funds are charging exit load upto few days only.

How to be more tax efficient:

Liquid mutual funds provide good opportunity for short term investments, however the dividend distribution tax is 27% and everyone gets hurt with this. There is a way to be more tax efficient. You can opt for Dividend reinvestment. Dividend stripped will be reinvested as units and they are treated as fresh investment. Since these are now fresh costs, any returns on these would be small and you can lower your income tax.  

Top 5 liquid mutual funds for short term investment

These top 5 mutual funds have been arrived based on below parameters.

  1. Top 5 funds picked based on highest returns received in the last 3 years. The selection is based on highest returns for 3 months, 6 months, 1 year, 2 years and 3 years
  2. Funds which are rated by Crisil as rank-1 which specifies good fundamentals for these top 5 mutual funds.
  3. AUM (Assets under management) > 1000 crores. This provides investor confidence among these top 5 mutual funds.

Top 5 liquid mutual funds for short term investment-Jan-2013

Conclusion: Liquid mutual funds are for short term investments. Look at the features and comparison with savings bank account or ultra short term mutual funds and you can decide which one to go based on your investment objectives and period of investment. Invest in this Top 5 liquid mutual funds to increase your returns.

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Top 5 liquid mutual funds for short term investment

Suresh KP


  1. Liquid funds gives Return Of approx 9% but tax is 27% while bank deposit gives 6.9% against FD for 1 yr, my tax bracket is 20% but income from FD is sure.. …still should I invest in liquid funds? Please guide

    1. Shailendra, Liquid funds are those where you want to park your money termporarily from 1 day to 1 year. You should invest in such liquid funds where you are not sure when you may need money (e.g. downpayment for home or emergency money). In such case, you can invest in liquid funds. They can give you upto 8% per annum. However for Bank FD’s if you withdraw say after 3 months the applicable interest rate is only 4% per annum. This is where you need to apply intelligence and invest in liquid funds. If you want to pay your money for 1 year straight, you for bank FD’s.

  2. Hi Suresh,

    I would like to invest 10k every month for next 6-12 months and if need any emergency I will have to widhrawl immediately. So i just wanted to check with you whether Liqid-MF are good or Bank deposit suitable for my short term investment?  i think liquid funds are good in this category but i need your advice for good funds for short term investment.

    Siva, Chennai.


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