Top 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
- These liquid mutual funds invest in short term instruments which gets matured in less than 90 days.
- There is no exit load for liquid mutual funds.
- Dividend distribution tax of 27% is applicable on returns.
- The returns on liquid mutual funds would be higher when interest rates are falling as short term securities interest rates would increase.
- The last 3 years returns on Top 5 mutual funds are ranging between 8% to 9.6% p.a.
- 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.
- 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).
- 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
- 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.
- 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.
- 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.
- 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
- Funds which are rated by Crisil as rank-1 which specifies good fundamentals for these top 5 mutual funds.
- AUM (Assets under management) > 1000 crores. This provides investor confidence among these top 5 mutual funds.
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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Suresh
Top 5 liquid mutual funds for short term investment
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I need to invest 20k one time with higher returns, which is the best source to invest, pls guide me
Hello Manjunath, What is your risk appetite and for how long you can invest? Based on this, the investment option would depend
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
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.
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.
Thanks,
Siva, Chennai.
Mr Suresh
Pl suggest fund for parking emergency fund.
Also suggest funds for 1.5 yr horizon.
Liquid funds : Growth and dividend.
Can you detail them?
Hi Suresh,
Wanted to invest in liquid funds for a lumpsum of 5 lakhs for about 6 months..what would be the profit and the tax deductions after 6 months
I would like to invest 6000-8000 every month for short term period, atleast for 1 year and i might extend for next following year. Can you please advise which would be best mutual fund from where i can get max interest rate.
Sumeet, You need to invest in SIP for long term of say 5 to 10 years. Since you wanted to invest for 1 year only and you may extend lateron, I am assuming that you would keep this money for say 5 to 10 years. In such case you can invest in balanced funds like HDFC balanced fund or ICICI balanced fund. If you want to invest just for 1 year and take out money, you can look for debt funds instead.
Hi Suresh,
The table indicated above is of Jan 2013, does this still hold good or can you please suggest Top 5 liquid funds as of Jan 2016. Many thanks in advance
Regards,
Prashanth
These are still good Prashant
Thanks for immediate reply Mr Suresh
I want to invest a lumpsum amount of 4.5lakhs for a period of 5 years, primarily in mutual funds.Please advice the best way.
Sir, What is your opinion on Reliance Liquid fund. Is it safe to invest in that fund? Kindly advise. Thanks you very much Sir.
This is liquid fund. If you want to park money for very short term, go ahead
Suresh Sir, Kindly advise us the top 3 Liquid funds to park money as direct investment in Divident reinvestment mode. Only could not understand how Div reinvest plans would reduce the tax liability. Kindly enlighten
Sanjay, You can select any of these 5 liquid funds.ย
Suresh sir, Can I use liquid mutual fund to build a emergency fund, meaning that money which I may need in emergencies but may not need if there is no emergency also. My target is to amass a corpus of 2.5 lac by sip. and also when I reach the target, is it good idea to keep the money there or should I transfer it to a savings account then.Pardon me if this question is very foolish. I have just got job and new to this whole financial things.
Amrita, You can do that. But instead invest in bank RD as you would get safe and assured returns on your emergency money.ย
Exit load: Liquid funds do not have exit load, whereas Ultra short term funds have exit load if withdrawn before 1 year.
Incorrect information: Ultra short term funds have exit load only if withdrawn before a month. If it has a one year time period its not "ultra-short" term fund. Please check.
Hello My dear friend. I have corrected it. Thanks for your kind advice.ย
Hi suresh,I would like to invest money for long term returns…and also please re
Recomend child plans..thx sir
Invest in diversified mutual funds and large cap mutual funds for long term. Pls see this articleย https://myinvestmentideas.com/2012/12/top-10-mutual-funds-for-sip-to-invest-in-2013/
Dear Suresh Ji,
Can you pls advise some of best debt fund to invest(alternate of bank FD). Also advise what to choose between growth & dividend while considering debt funds.
Thanks
Jeetu, My suggestion is to choose growth option to grow your money. Below is the link of top-10 debt mutual funds.https://myinvestmentideas.com/2013/02/top-10-debt-mutual-funds-to-invest-in-2013/
Also can we choose liquid fund as source fund for systemic transfer plan.
Please reply.
Yes Parm
For what tenure we can invest in liquid fund, 1 year or more than 1 year.
Parm, liquid funds are good for very short term period of <= 1 year.
Many thanks for the reply suresh sir.
So can we choose depth fund ย ( source fund for STP ) to invest in for 2 to 3 years without any exit load ( for STP)
And is it right to opt for dividend reinvestment option for the source fund and why ?
Parm, yes, you can choose debt mutual funds. Dividend reinvestment option would help you to get good returns by maturity instead of getting dividends on Quarterly or yearly basis.
I think it is now 61 days not 90 days.Please check sir .
Harish, Since you have expressed benefit of doubt, I rechecked and the period is upto 90 days only. Pls inform the basis of your assumption.