Understanding the Basics: What Are Liquid Funds and How Do They Work?

Liquid funds are a popular investment option known for their liquidity and low-risk nature. They provide individuals and corporations with a convenient avenue to park surplus funds and earn returns. In this article, we will delve into the details of liquid funds, their characteristics, working mechanisms, and the benefits they offer. For expert advice and information on liquid funds and other financial topics, visit MoneyHelpr.com.

1. Definition and Characteristics of Liquid Funds:

Liquid funds are open-ended mutual funds that primarily invest in short-term debt instruments with a residual maturity of up to 91 days. They are designed to provide stability, liquidity, and low volatility to investors. These funds goal is to save capital while generating modest returns.

2. Purpose and Objectives of Liquid Funds:

The primary purpose of liquid funds is to offer a safe and liquid investment avenue for individuals and corporations. They help investors park their surplus funds temporarily while ensuring easy accessibility. The key objectives of liquid funds include capital preservation, providing liquidity, and generating reasonable returns.

3. Types of Securities and Instruments Held by Liquid Funds:

Liquid funds predominantly invest in instruments such as treasury bills, commercial papers, certificates of deposit, and high-rated corporate bonds. These securities are known for their short maturity periods and high credit quality, which contribute to the stability and safety of liquid funds.

4. Liquidity and Redemption Features of Liquid Funds:

One of the key advantages of liquid funds is their high liquidity. Investors can redeem their investments at any time, typically without any exit load. The redemption proceeds are usually credited to the investor’s bank account within a short period, making liquid funds an ideal choice for emergency funds or short-term financial goals.

5. Minimum Investment Requirements and Entry/Exit Load:

Liquid funds generally have low minimum investment requirements, allowing investors to start with small amounts. Moreover, they often do not charge any entry or exit load, making it cost-effective for investors to enter or exit the fund.

6. NAV Calculation and Valuation of Liquid Funds:

The Net Asset Value (NAV) of a liquid fund is calculated by dividing the total net assets of the fund by the number of units outstanding. NAV is typically calculated on a daily basis and reflects the fund’s underlying asset value. Valuation of securities held by liquid funds is done using the amortized cost or mark-to-market method.

7. Role of Asset Management Companies in Managing Liquid Funds:

Asset management companies (AMCs) play a crucial role in managing liquid funds. They have skilled fund managers who actively monitor the portfolio, conduct credit analysis, and make investment decisions. AMCs ensure adherence to regulatory guidelines and maintain transparency in the fund’s operations.

8. Regulatory Framework and Guidelines for Liquid Funds:

Liquid funds are governed by the Securities and Exchange Board of India (SEBI) regulations. SEBI has laid down guidelines regarding the investment universe, risk management practices, and disclosure requirements for liquid funds. These regulations aim to safeguard investor interests and maintain the integrity of the fund industry.

9. Comparison with Other Investment Options:

When considering investment options for short-term liquid funds, it is essential to compare liquid funds with alternatives such as fixed deposits and money market funds. Liquid funds offer higher liquidity and potential for better returns compared to fixed deposits, while money market funds may have varying risk profiles and investment strategies.

10. Benefits and Risks Associated with Investing in Liquid Funds:


  • High liquidity and easy access to funds.
  • Capacity for greater returns in compare to traditional or old methodology savings accounts.
  • Diversification and risk mitigation through a portfolio of short-term debt instruments.
  • Ideal for parking emergency funds or fulfilling short-term financial goals.


  • Interest rate risk, though relatively lower due to short maturity holdings.
  • Credit risk associated with the quality of debt instruments held by the fund.
  • Market volatility may impact the NAV of the fund.


Liquid funds are an attractive investment option for individuals and corporations seeking liquidity, stability, and modest returns. They offer the convenience of easy access to funds while minimizing risk exposure. Understanding the basics of liquid funds is crucial to make informed investment decisions. For expert guidance and insights on liquid funds and other financial topics, visit MoneyHelpr.com, your trusted financial resource.

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