You can keep money in a liquid fund for as long as you want, as they have no maximum holding period or lock-in restrictions. While designed for short-term parking (ideally 7 days to 3 months), you can hold them for years, although they are generally not recommended for long-term wealth creation due to lower returns compared to equity.
A liquid fund investor can keep his or her money for as long as necessary. Although there is a minor exit load for redemptions within seven days, liquid funds have flexible holding periods. This allows for simple entry and exit while delivering safe, market-linked returns for the duration of the investment.
As per SEBI mandate, liquid funds must invest in debt or money market instruments that mature within 91 days. Liquid mutual funds usually invest in money market instruments like Treasury Bills (T-Bills), Tri Party Repos (TREPs), Commercial Papers (CPs) and Certificates of Deposit (CDs), etc.
Investors who typically park their surplus in fixed deposits or savings accounts may benefit more from liquid funds. Unlike fixed deposits, which involve lock-ins and penalties for early withdrawal, liquid funds offer easier access and typically higher returns—often exceeding 5% compared to 3%–4% in savings accounts.
While the money in bank account is insured up to 5 lakhs by DICGC (a government body), the interest rates earned by a typical bank saving account range from 3.5% to 4.25% p.a. In contrast, investing in a liquid fund can provide an average yearly return of around 6.5%, subject to returns linked to the underlying ...
The 7-3-2 rule is a financial strategy for wealth building, suggesting it takes 7 years to save your first major financial goal (like a crore), then accelerating to achieve the next goal in 3 years, and the third goal in just 2 years, leveraging compounding and disciplined, increased investments (like a 10% annual SIP hike). It highlights how returns compound faster over time, drastically reducing the time needed for subsequent wealth targets, emphasizing patience and consistent, growing contributions.
Liquid Fund is a class of debt fund that with maturity tenures of up to 91 days. A type of Debt Fund, Liquid Funds, are taxable. Dividends earned from a Liquid Fund is exempt from tax. Short-term and long-term capital gains are taxable, per investors' income tax slabs.
Most liquid funds have no lock-in periods. This ensures quick access to one's capital, anytime one needs it. Furthermore, redemption timelines on liquid funds are as low as 24 hours in most cases, making them ideal for parking funds for unforeseen contingencies.
Financial experts typically recommend keeping an emergency fund that can cover three to six months of expenses, which should be able to cover all your unexpected costs, or short-term projects. Recommended cash reserves: At home: $200–$500 in small bills for immediate emergencies.
Money market funds
Like savings accounts, they are extremely liquid and allow you to access your money quickly when needed. One key benefit of money market funds is that they're protected by SIPC, a nonprofit corporation that works to restore investors' cash and securities in the event of a brokerage firm failure.
To use the rule of 72, divide 72 by the fixed rate of return to get the rough number of years it will take for your initial investment to double. You would need to earn 10% per year to double your money in a little over seven years.
Liquid Mutual Funds do not have a lock-in period, allowing investors to withdraw money anytime. However, some funds may charge an exit load if redeemed within seven days of investment.
Lowest interest rate risk: Of all the debt funds available in the market liquid funds have the least interest rate risk. Better returns than a savings account and FD: One can expect a return of 5%-6% from liquid funds per annum which is better than savings bank interest (2%) and return from FD (4%).
Even the past performance of liquid funds category vouches for this, as it has generated average 6.94% returns for the investors over the past one year and further, 6.77% and 7.40% returns over 3-year and 5-year period respectively.
The investment of investor capital with these funds is done in high-quality and short-term investments. It comprises treasury bills and repos, among other instruments that have a maturity of up to 91 days as per the SEBI guidelines, making them one of the best liquid mutual funds. 1.
The debate over FD or liquid fund for short-term needs usually favours liquid funds due to their higher liquidity and potentially better post-tax returns.