Liquid / UST Liquid Funds - Best solution for Idle Funds


Ideal Parking Grounds for your Surplus Cash

Do you have surplus money in hand but donít wish to lock them in fixed deposits? Then, instead of holding huge sums in your savings bank, you can explore options such as liquid funds.

In the current high interest rate scenario, if you wish your money to earn a bit while you hold them, then liquid funds can do a better job than savings account. The average return of liquid funds in the last one year was around 9 per cent. That is as much as fixed deposit rates.

What is Liquid Funds?

Liquid funds are simply debt mutual funds that invest your money in very short-term market instruments such as treasury bills, government securities and call money that hold least amount of risk. These funds can invest in instruments up to a maturity of 91 days. The maturity is mostly much lower than that.

They are least risky as well as least volatile in the category of mutual funds for the following reason: one, mutual funds mostly invest in instruments with high credit rating (P1+). Two, unlike other funds, the NAV of liquid funds is not volatile as the only change in their NAV is mostly as a result of the interest income that accrues. In other words, given their short-term maturities, these instruments are hardly traded in the market. They are held until maturity. Hence, their NAV only sees a change to the extent of interest income accrued, everyday, including weekends.

Difference between ultra-short-term funds & Liquid Funds

Another category of short-term debt fund called the ultra short-term fund is also suitable for short-term investing. But these are one notch higher on the risk chart (Risk only on Interest & not on capital) compared with liquid funds. This is because ultra-short-term funds can invest in short-term instruments that have a maturity of over three months.

But there are some Ultra Short Term Liquid funds where these funds invest mostly into papers having maturity of less than 91 days (similarly like Liquid Funds) but have a little exposure to papers above 91 days to get the high yield.

When to opt

Liquid funds / Ultra Short Term - Liquid Funds are ideal parking grounds when you have a sudden influx of cash either because you have received money from any legal settlement or from maturity of investments. It is noteworthy that liquid funds can almost be a full-fledged substitute for a savings bank account. There are some funds available in the industry where they issue ATM / Debit Cards for Liquid funds same like your savings bank.

Given the low interest rates (about 4 per cent mostly and 6-7 per cent in the case of one or two banks for more than 1 Lakh minimum deposit) in savings account, you would do well to temporarily put your money in liquid funds to earn slightly higher interest. You can exit the scheme anytime without any exit load and receive your funds the next working day.

Another way to make use of liquid funds is invest your lump sum  in them and then opt for a systematic transfer plan to invest in equity funds of your choice. Often, you would use SIPs to invest in equity funds. That is fine when you invest out of your monthly savings. But if you receive a large sum at one go, you can use liquid funds in such instances, to enhance your returns where your interest part alone is transferred to equity funds. This is only an option and not a compulsion in Liquid Fund.

How to be tax efficient

You may view liquid funds as inefficient tax vehicles as they suffer from short-term capital gains tax (at your regular tax slab) if held for less than a year. Hence, if you are in the high tax bracket, this does hurt. But there is a more efficient strategy to handle this.

Consider opting for dividend reinvestment. The dividends stripped will be reinvested as units. These will be considered as fresh investments. With a low NAV stripped off dividend and reinvested units considered as fresh cost, your capital gain (sale-cost) will be almost nil or very low.

But if you are holding liquid or ultra short funds for over a year, then, you may well opt for growth option as you will get indexation benefits.


Ultra Short Term Liquid Funds Portfolio Performance (Simple Annualised) Invest Now
Fund Name      Corpus (in Crs) Avg Maturity (in Yrs) 1 Month 3 Months 6 Months 1 Year Online Download Application Form
Franklin India Ultra Short Bond Fund -
Super Institutional Plan
5904 8.51% 11.41% 10.36% 10.18% 9.96% Invest Online Application Form
Reliance Money Manager Fund
16335 7.40% 10.11% 8.97% 9.03% 8.78% Invest Online Application Form
HDFC Cash Management - Treasury 10135 7.62% 12.58% 10.63% 10.15% 9.01% Invest Online Application Form
Birla Sunlife Savings Fund 17594 7.48% 11.90% 10.10% 10.16% 9.70% Invest Online Application Form
ICICI Prudential Flexible Income Plan 19654 7.47 13.29% 10.52% 10.23% 9.53% Invest Online Application Form

Performance as on 22nd October 2016

Do you have any clarification / want to have more details, please feel free to contact us


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* Mutual Fund Investments are subject to Market Risk. Please read offer documents carefully before investing. Above schemes are selected based on past performance which may or may not sustain. Schemes mentioned above are just an article investing / choosing the fund is the option of investor

Also read :    Expert Pre-designed SIP Portfolio | Best Performing SIP Funds |


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