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What are the Benefits of Maintaining Liquidity in Mutual Funds?

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Created on
July 25, 2022


What’s Inside

Liquidity is a powerful financial tool that brings convenience and flexibility to your portfolio. Liquid mutual funds are a prime example, specifically designed to offer high liquidity.

Let us answer the question, "What is a liquid fund in mutual funds?” and discover their numerous benefits.

Understanding Liquidity in Mutual Funds

The ease of an asset's or security’s conversion into cash is known as ‘liquidity’. It also bears in mind the least negative impact on its market price during the conversion. In mutual funds, liquidity can be defined as the speed and ease with which you can access your holdings and convert them into cash. Mutual funds with high liquidity allow you to redeem your units quickly, providing financial freedom and the ability to meet your planned goals and unplanned requirements.

What are Liquid Funds in Mutual Funds

Liquid mutual funds are a type of mutual funds that prioritise liquidity foremost. They invest in short-term, highly liquid money market instruments such as Treasury Bills, Certificates of Deposit, and Commercial Paper. The objective is to ensure that investors can swiftly access their funds when needed. Liquid funds are often considered an ideal parking place for surplus funds or emergency reserves.

Benefits of Liquid Mutual Funds

  • Instant Access:

Liquid funds provide quick redemption, ensuring your funds are readily available when urgent needs arise.

  • Low Risks:

Investing in high-quality, short-term instruments minimises the risk associated with market fluctuations.

  • Steady Returns:

Although they are not designed for high growth-high returns, liquid funds offer stable returns, often surpassing the interest offered by traditional savings accounts.

  • No Exit Load:

Unlike some other mutual fund categories, liquid funds have no lock-in period. You can redeem your units at any time without penalties.

  • Flexibility:

Liquid funds allow you to invest (Systematic Investment Plan – SIP) or withdraw (Systematic Withdrawal Plan – SWP) smaller amounts, enhancing flexibility in managing your finances.

Before Investing in Liquid Mutual Funds...

While liquidity in mutual funds offers a range of benefits, it's essential to consider certain factors and potential risks.

  • Thoroughly research funds, considering historical performance and investment strategy.
  • Ensure that your investments align with your financial objectives and risk tolerance.
  • Liquid funds invest in short-term instruments sensitive to interest rate changes. Fluctuations can impact fund returns.
  • While less volatile than equity funds, liquid funds are not immune to market fluctuations.
  • Although liquid funds focus on high-quality instruments, a minimal credit risk is still associated with issuer defaults.
  • Evaluate expense ratios, as higher expenses can erode returns over time.
  • Short-term capital gains tax may apply if you redeem units within three years of investment.

To Sum It Up

Liquidity in mutual funds makes them an ideal avenue for building an emergency fund.  Whether you're a conservative investor seeking stability or someone looking to park surplus funds, the benefits of liquidity in mutual funds can help you preserve your capital, gain better-than-bank account returns, and have your money at your disposal.

Exploring Liquid Funds With Fi

You can explore and invest in various liquid and other mutual funds on Fi. Moreover, Mutual Fund investments on Fi are commission-free. With its intuitive user interface, suited for novice & seasoned investors, you can select from over 900 direct Mutual Funds. Plus, Fi's 100% secure as it functions under the guidance of epiFi Wealth, a SEBI-registered investment advisor. To help simplify the steps involved, you can invest daily, weekly, or monthly via automatic payments or SIPs — created with one screen tap. Moreover, Fi offers 100% flexibility with zero penalties for missed payments.

Frequently Asked Questions

1. How does liquidity impact the accessibility of my invested funds?

Liquidity ensures that your invested funds can be quickly converted into cash without significant price changes, providing you with easy access when needed.

2. What are the key benefits of having liquidity in Mutual Funds?

High liquidity in Mutual Funds offers instant access to funds, safety from market fluctuations, steady returns, no lock-in period, flexibility, and suitability for building emergency reserves.

3. How are liquidity and investment risk related in Mutual Funds?

Liquidity and investment risk are inversely related. High liquidity reduces the risk of being trapped in an investment during unfavourable market conditions, enhancing your ability to respond to changes.

4. How quickly can I access my funds in a liquid Mutual Fund?

Liquid Mutual Funds offer swift redemption, allowing you to access your funds within a short period, usually a few business days. This quick access ensures financial responsiveness.

5. How do liquid Mutual Fund returns compare to savings accounts?

Liquid Mutual Funds typically offer higher returns than traditional savings accounts due to their investment in short-term instruments, making them a more lucrative option for parking surplus funds.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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