✅Why Liquid Funds Are Considered Better in 2025?

internship04
May 24
2 min read

Liquid funds have gained popularity among investors looking for safe and flexible short-term investment options. These funds are a type of debt mutual fund that invest in low-risk, short-term market instruments and typically offer higher returns than fixed deposits (FDs) with more liquidity and tax efficiency.

💼 What Are Liquid Funds?

Liquid funds are mutual funds that invest in:

Treasury bills
Commercial papers
Certificates of deposit
Other debt instruments with a maturity period of up to 91 days

They aim to provide capital safety, quick access to funds, and reasonable returns—making them ideal for short-term investors and emergency funds.

📈 Returns Compared to Fixed Deposits (FDs)

Returns from liquid funds are comparable or slightly better than FDs (typically ranging between 5% to 7% annually in recent years).
Unlike FDs, liquid funds do not have lock-in periods, offering superior flexibility.

🔓 Liquidity & Flexibility

No entry or exit loads
Same-day redemption possible: If you place a redemption request before 2 PM, the money is usually credited to your bank account by 10 AM the next day.
Partial withdrawals are allowed, making it ideal for parking surplus funds.

💰 Taxation Benefits (Updated for 2025)

Bank FDs:

Interest is added to your total income and taxed at your slab rate.

Liquid Funds:

Short-Term Capital Gains (STCG): If units are held for less than 36 months, taxed at your income tax rate.
Long-Term Capital Gains (LTCG): If held for 36 months or more, taxed at 20% after indexation (helps adjust gains for inflation).
No TDS (Tax Deducted at Source) is applicable on redemptions.

Dividend Plans (If applicable):

Dividends are tax-free in the hands of investors, but Dividend Distribution Tax (DDT) is paid by the fund.
High tax bracket investors can consider dividend options, while those in the lower brackets may choose growth plans.

Particulars	FDs	Liquid Funds
Interest Income	Added to income and taxed at the applicable rate	Units held<36 months: Taxed at normal rate Units held>36 months: Taxed at 20% after indexation
Dividends	Taxable by the investor	Dividend distribution tax payable by the fund
TDS	Applicable	Not applicable

⚠️ Risk Factors – Are Liquid Funds Safe?

While liquid funds are low-risk, they are not completely risk-free:

Bank FDs are insured up to ₹5 lakh (as per RBI 2023 rules).
Liquid funds carry market and credit risk depending on where the fund manager invests.
Some schemes may seek slightly higher returns by investing in lower-rated debt instruments, which increases risk.

✅ How to Reduce Risk:

Choose funds with a strong track record.
Check the credit quality of underlying assets.
Invest in funds managed by reputed AMCs (Asset Management Companies).

📝 Final Thoughts

Liquid funds offer a blend of safety, returns, and liquidity, making them a better alternative to fixed deposits for short-term financial goals and emergency planning. With no lock-ins, better taxation, and same-day liquidity, they are an efficient way to park surplus money smartly in 2025.