Looking for a safe short-term investment in India that offers better returns than your savings account and still keeps your money accessible? That’s where liquid mutual funds step in.
In 2025, as interest rates remain elevated and market volatility continues, many Indian investors are turning to liquid funds, a type of short-term debt mutual fund to park their idle cash smartly. Whether you’re building an emergency fund, waiting to re-enter equity markets, or just want to earn more than 3% in a savings account, liquid funds in India offer a balance of liquidity, low risk, and steady returns.
In this blog, we’ll explore:
- What liquid funds are
- Why they’re a great option in 2025
- A list of the best liquid funds to invest in this year
- Tips to choose the right fund
- Taxation, safety, and use cases
Let’s dive in.
What Are Liquid Funds?
Liquid funds are a type of debt mutual fund that invest in short-term money market instruments like treasury bills, commercial papers, and certificates of deposit, each having a maturity of up to 91 days.
These funds are designed to offer high liquidity, meaning you can access your money quickly typically within T+1 day (next business day). Some platforms even offer instant redemption up to ₹50,000, making them ideal for parking surplus cash.
Key Features of Liquid Funds
- Tenure of investments: Only up to 91 days
- Low risk: Minimal interest rate risk and negligible credit risk (if AAA instruments used)
- Returns: Generally higher than savings accounts; in 2025, expect 6.5%-7.2% annualised
- Liquidity: T+1 redemption or instant withdrawal options
- No exit load: After 7 days in most cases
Example: Let’s say you receive a bonus of ₹50,000 and don’t plan to use it for 2-3 months. Rather than leaving it in a savings account, you can put it in a liquid mutual fund and potentially earn 7% instead of 3%.
Instruments That Liquid Funds Invest In
| Instrument | Typical Maturity | Risk Level | Return Profile |
| Treasury Bills (T-Bills) | 91 days or less | Very Low | Moderate, steady |
| Commercial Papers | Up to 3 months | Low | Higher than T-Bills |
| Certificates of Deposit | Up to 91 days | Low | Competitive yields |
In short, liquid funds in India are a reliable parking ground for short-term capital without locking it up like an FD. You get the benefit of market-linked returns with high safety and flexibility, a win-win for 2025.
Why Invest in Liquid Funds in 2025?
Investors seeking the best liquid funds 2025 should understand the major advantages these funds offer compared to other short-term investment options. Here’s why top liquid funds India 2025 are a popular choice for both new and seasoned investors:
- High Liquidity: Investors can redeem units at any time, with proceeds typically credited within 1 day. This allows for instant access to funds, ideal for emergency needs or short-term parking of surplus money.
- Low Risk Profile: Liquid funds invest in high-quality, short-maturity instruments. This reduces interest rate sensitivity and credit risk, making them more stable than most other debt or equity-based funds.
- Attractive Returns: Historically, liquid funds have delivered higher returns than traditional fixed deposits over short periods, especially in times of fluctuating interest rates.
- No Lock-in Period: Unlike FDs or other fixed-income products, there’s no mandatory holding period, so you enjoy full flexibility.
- Tax Efficiency: Gains from liquid funds, if held for a short term, are taxed as per your income slab. If you hold for a longer duration, certain funds may offer marginal tax benefits, especially for investors in higher tax brackets.
- Ease of Investment & Redemption: Most platforms offer direct, paperless transactions and even ‘instant redemption’ facilities up to a specified limit, making it very easy to access your funds when required.
- Transparent Portfolio: Liquid funds disclose their portfolio and returns regularly, enabling investors to compare and choose funds in line with their goals.
With these benefits, the best liquid mutual funds to invest in 2025 stand out as a reliable and efficient vehicle for those prioritizing safety, liquidity, and competitive returns for short-term investments.
Factors to Consider Before Investing in Liquid Funds
When selecting the best liquid funds 2025, keep these essential criteria in mind to make an informed, low-risk choice:
- Expense Ratio: Opt for funds with a lower expense ratio, as high charges can significantly eat into your short-term returns. Compare expense ratios when reviewing the top liquid funds India 2025.
- Portfolio Quality: Evaluate the credit quality of instruments within the liquid fund portfolio. Prefer funds investing in highly rated (AAA/A1+) instruments to minimize default risk.
- Past Performance (With Caution): While historical returns provide context, do not rely solely on past numbers. Market conditions change, so assess consistency and downside protection in different interest rate cycles.
- Asset Under Management (AUM): Funds with reasonable to high AUM tend to be more stable and efficiently managed, but extremely large funds may face difficulties in nimble allocation. Strike a balance depending on your comfort level.
- Exit Load: Some liquid funds may levy a minimal exit load if redeemed within a specific short period (often up to 7 days). Always check the exit load structure to avoid unnecessary deductions.
- Instant Redemption Facility: Many liquid funds now provide instant redemption (up to ₹50,000 or 90% of investment, whichever is lower), which can be invaluable for emergency liquidity.
These factors help you narrow down the safest and highest-return liquid funds 2025 according to your own risk profile and short-term needs. They also aid in comparing liquid funds vs fixed deposit 2025, as flexibility and cost impact final returns.
Suggested Read: Mutual Funds or Stocks: The Best Starting Point for Beginners in 2025
Top Liquid Funds to Consider in 2025
Here’s a curated list of leading liquid mutual funds in India that blend strong performance, large AUMs, and low-cost structures making them ideal best liquid funds in 2025.
| Fund Name (Direct Plan) | 1Y Return (%) | 3Y Return CAGR (%) | AUM (₹Cr) | Expense Ratio (%) |
| Aditya Birla Sun Life Liquid Fund | ~7.08 | ~7.13 | ₹49,486 | ~0.21 |
| Edelweiss Liquid Fund | ~7.18 | ~7.12 | ₹7,826 | ~0.09 |
| Axis Liquid Fund | ~7.20 | ~7.11 | ₹33,529 | ~0.12 |
| Mahindra Manulife Liquid Fund | ~7.16 | ~7.11 | ₹1,018 | ~0.14 |
| Bank of India Liquid Fund | ~7.16 | ~7.10 | ₹2,088 | ~0.11 |
| Mirae Asset Liquid Fund | ~7.16 | ~7.09 | ₹11,238 | ~0.09 |
| Nippon India Liquid Fund | ~7.16 | ~7.09 | ₹34,489 | ~0.20 |
| SBI Liquid Fund | ~7.07 | ~7.03 | ₹62,208 | ~0.21 |
Top Liquid Funds 1-Year Returns (as of July 2025)
| Fund Name (Direct Plan) | 1Y Return (%) |
| Axis Liquid Fund | ~7.20 |
| Edelweiss Liquid Fund | ~7.18 |
| Mahindra Manulife Liquid Fund | ~7.16 |
| Bank of India Liquid Fund | ~7.16 |
| Mirae Asset Liquid Fund | ~7.16 |
| Nippon India Liquid Fund | ~7.16 |
| Aditya Birla Sun Life Liquid Fund | ~7.08 |
| SBI Liquid Fund | ~7.07 |
Top Liquid Funds 3-Year CAGR Returns
| Fund Name (Direct Plan) | 3Y CAGR (%) |
| Aditya Birla Sun Life Liquid Fund | ~7.13 |
| Edelweiss Liquid Fund | ~7.12 |
| Axis Liquid Fund | ~7.11 |
| Mahindra Manulife Liquid Fund | ~7.11 |
| Bank of India Liquid Fund | ~7.10 |
| Mirae Asset Liquid Fund | ~7.09 |
| Nippon India Liquid Fund | ~7.09 |
| SBI Liquid Fund | ~7.03 |
Fund Size & Expense Ratio
| Fund Name (Direct Plan) | AUM (₹Cr) | Expense Ratio (%) |
| SBI Liquid Fund | ₹62,208 | ~0.21 |
| Aditya Birla Sun Life Liquid Fund | ₹49,486 | ~0.21 |
| Nippon India Liquid Fund | ₹34,489 | ~0.20 |
| Axis Liquid Fund | ₹33,529 | ~0.12 |
| Mirae Asset Liquid Fund | ₹11,238 | ~0.09 |
| Edelweiss Liquid Fund | ₹7,826 | ~0.09 |
| Bank of India Liquid Fund | ₹2,088 | ~0.11 |
| Mahindra Manulife Liquid Fund | ₹1,018 | ~0.14 |
Why These Funds Stand Out
- Consistent returns: All hover around ~7% p.a. over 3 years, translating into low volatility and stability.
- AAA instruments: Portfolios largely invest in high-credit-rated instruments for safety.
- Low expense: Especially Edelweiss, Axis, and Mirae with sub-0.15% fee structures.
- High liquidity: Large AUMs like SBI and Aditya Birla ensure smoother redeemability even in bulk.
Suggested Read: Best Mutual Funds for Gen Z and Millennials to Invest in 2025
How to Choose the Best Liquid Fund
Selecting the best liquid funds 2025 isn’t just about chasing the highest return, it’s about finding a fund aligned with your unique financial needs and risk profile. Here’s a simple framework to help you choose from the top liquid funds India 2025 has to offer:
- Assess Your Liquidity Needs: Determine why you’re investing. Are you parking for an emergency fund? Planning for short-term expenses? Choose a fund with robust instant redemption features and proven quick settlement records if rapid access is crucial.
- Evaluate Your Risk Profile & Investment Horizon: Although liquid funds are low risk, review the credit ratings of the instruments held by the fund. If your horizon is strictly under 3 months, stick with funds prioritizing AAA/A1+ investments with a history of conservative management.
- Direct vs Regular Plan: Opt for a Direct Plan to benefit from a lower expense ratio if you are comfortable transacting via AMC or investment platforms. If you prefer guidance, select a Regular Plan through an advisor (note: this will have a higher expense ratio).
- Growth vs Dividend Option
- Growth: Returns are reinvested, compounding your gains over time ideal for maximizing returns when you don’t need periodic withdrawals.
- Dividend (now called IDCW): Payouts at intervals, but actual returns may be lower after tax as per the new SEBI guidelines.
- Growth: Returns are reinvested, compounding your gains over time ideal for maximizing returns when you don’t need periodic withdrawals.
- Compare Expense Ratios and Past Volatility: The difference in returns is often in the costs. Go for funds with consistently low expense ratios and limited volatility in historical performance, while remembering that past returns do not guarantee future results.
- Track Service & Digital Access: If seamless digital access and app-based management are important, check if your shortlisted fund offers efficient online servicing and instant liquidity through popular platforms.
Pro Tip: Use dedicated tools to filter and rank funds by these parameters. And always review the latest fund factsheet before making your final choice.
Quick Selection Checklist
| Criteria | What to Look For |
| Credit Quality | 98-100% AAA-rated holdings |
| Returns | Consistent 1Y & 3Y returns around ~7% |
| Expense Ratio | ≤ 0.20% (Direct Plan preferred) |
| AUM | At least ₹5,000 Cr for liquidity and scale |
| Risk Metrics | Low standard deviation, high Sharpe ratio |
| Redemption Terms | No heavy exit load beyond first 6–7 days |
With this checklist, your investment in the best liquid mutual funds to invest in 2025 will be both rational and robust matching both your lifestyle and your financial goals.
Taxation on Liquid Funds in 2025
Understanding the latest tax rules for liquid funds (a subset of debt mutual funds) is crucial, especially given multiple revisions introduced from April 2023 and July 2024.
Taxation Overview for Indian Resident Investors
For investments made on or after April 1, 2023
- All gains irrespective of duration are classified as short‑term capital gains (STCG).
- These gains are added to your total income and taxed at your applicable slab rate.
- No indexation benefit, and no long‑term capital gains classification applies.
For investments made before April 1, 2023, and redeemed
- Before July 23, 2024: Gains held over 36 months qualify as long‑term capital gains (LTCG) at 20% with indexation.
- On or after July 23, 2024: Long-term gains capped at 12.5% (above ₹1.25 lakh/year), without indexation; STCG taxed at slab rate.
Impact of Budget 2025 (FY 2025‑26 onwards)
- Section 87A rebate allows tax exemption up to ₹12 lakh of total income inclusive of gains from liquid/debt funds.
- This means a middle‑income investor could realize up to ₹60,000 in gains tax-free via LTCG exemptions.
Tax Treatment Summary Table
| Investment Date | Holding Period | Tax Classification | Tax Rate | Indexation |
| ≥ 01 Apr 2023 (any holding) | N/A | STCG | Slab rate | No |
| < 01 Apr 2023, redeemed before 23 Jul 2024 | <36 months | STCG | Slab rate | Yes (if LTCG) |
| < 01 Apr 2023, redeemed on/after 23 Jul 2024 | ≥24 months | LTCG | 12.5% (above ₹1.25L) | No |
Tax on Dividends
- Dividends from liquid funds are treated as regular income and taxed as per the individual’s slab rate.
- TDS of 10% is applicable if annual dividend income exceeds ₹5,000.
For NRIs
- Capital gains (from redemptions) are subject to TDS at 30% (as STCG under Section 115A).
- Dividends are taxed at 20% TDS, if exceeding ₹5,000 annually.
- NRIs may claim relief under applicable Double Taxation Avoidance Agreements (DTAA) by filing proper forms.
Key Takeaways
- If you invest in liquid funds after April 1, 2023, expect slab‑rate taxation regardless of how long you hold.
- For pre‑April 2023 investments:
- Selling before July 23, 2024 → standard LTCG rules with indexation.
- Selling on or after July 23, 2024 → taxed at 12.5% without indexation.
- Selling before July 23, 2024 → standard LTCG rules with indexation.
- Use Section 87A rebate strategically: incomes up to ₹12 lakh (including capital gains) may be tax-free.
- Dividends are taxed per slab and may incur 10% TDS above ₹5,000.
- Non-resident investors face higher TDS rates but favorable treaty conditions may apply.
Use Cases: When to Use Liquid Funds in 2025
Liquid funds in India remain one of the best short-term mutual funds for various financial use cases:
Building an Emergency Fund
Liquid funds offer high liquidity and reasonable returns, making them ideal for emergency savings. Unlike leaving money idle in a savings account, you can earn ~6-7% while still having access within T+1 or through instant redemption.
Parking Booked Profits from Equity Investments
When you redeem equity holdings, liquid funds offer a safe place to temporarily park proceeds. This way, your money continues to earn better than the savings rate and stays ready for re-deployment without temptation to spend .
Buffer Before STP or SIP into Equity
Use liquid funds as an interim step between lump-sum investment and Systematic Transfer Plans (STPs) or SIPs into equity funds. It enables disciplined investing without leaving cash idle or risking market timing.
Managing Trading Cash Flow via Liquid ETFs
For equity traders, many brokers now allow parking idle cash in liquid ETFs. These trade like shares and offer better returns than keeping money idle in savings, while letting you pledge units for margin instantly.
Risks & Caveats of Liquid Funds
Understanding the Limitations
While liquid funds in 2025 are low-risk, they are not risk‑free. Here are key risk points investors must consider:
Credit Risk
Though liquid funds invest in high-quality, short-maturity instruments, there’s still a risk if an issuer defaults or faces a downgrade. Credit risk is permanent and can reduce NAV permanently.
Interest Rate Risk
Minimal in liquid funds due to short maturity (<91 days). However, extreme interest rate volatility can slightly affect fund NAVs, though impact remains limited.
Liquidity Risk
Though redemption is usually T+1 or instant, large redemption requests during stress periods might be delayed. SEBI mandates 20% of highly liquid instruments and sector caps to manage this risk.
Inflation Risk
Returns of ~6-7% may lag inflation over the long term. Liquid funds are meant for short-term capital parking, not long-term wealth creation.
Risks Summary Table
| Risk Type | Description |
| Credit Risk | Possibility of default or downgrade on corporate issuers |
| Interest Rate Risk | Limited sensitivity due to short duration; NAV impacts minimal |
| Liquidity Risk | Large outflows in stress scenarios may delay redemptions |
| Inflation Risk | Limited long-term return potential amid rising inflation |
Investor Checklist: Mitigating Risk
- Only consider funds with nearly 100% AAA-rated holdings.
- Check fund average maturity, ideally <30 days.
- Review monthly portfolio review or fact sheet for concentration risk.
- Only choose large AUM funds to ensure stability and smoother redemption.
- Use liquid funds only for temporary cash parking or emergencies, not long-term wealth building.
Final Thoughts
If you’re looking for a safe, flexible, and tax-efficient way to park your idle money in 2025, liquid mutual funds in India are among the smartest tools available.
They offer:
- Better returns than a savings account
- Quick access to your funds (T+1 or even instant)
- Low risk, especially when invested in AAA-rated instruments
In times of market uncertainty or for planned short-term goals, the best liquid funds in 2025 can provide a cushion without compromising on liquidity or return potential. Whether you’re an investor waiting for the right entry into equities or building an emergency fund, liquid funds give your idle cash a purpose.
Just remember: they’re not substitutes for long-term wealth creation, but a powerful ally for capital preservation and short-term needs.
FAQs
Is liquid fund better than FD?
Both investments are great for differing needs. Tax Efficiency: Liquid Funds are more tax-efficient than FDs, especially for individuals in higher tax brackets. The indexation benefit may also apply to long-term Liquid Fund investments, further reducing tax liabilities.
Are liquid funds 100% safe?
While liquid funds are considered low-risk compared to other mutual fund categories, they are not entirely risk-free. They are subject to credit risk, interest rate risk, and liquidity risk, although these risks are generally lower than in other types of funds.
Is it a good time to invest in liquid funds?
Liquid funds can act as a haven during periods of market volatility. They offer stable returns with minimal risk of capital loss due to their investment in short-term, high-quality debt instruments.
Are liquid funds safe during a recession?
These instruments generally have maturities of up to 91 days, which helps reduce interest rate risk. The low inherent risk associated with the type of securities Liquid Funds hold makes them less susceptible to market fluctuations, ideal for investors seeking safety and liquidity during volatile times.
How long can we invest in liquid funds?
A Liquid Mutual Fund is a debt fund that invests in fixed-income instruments like commercial paper, government securities, treasury bills, etc., with a maturity of up to 91 days. The net asset value or NAV of a liquid fund is calculated for 365 days.
