If you are looking for an avenue to park your funds for a short period of time, usually less than a year – for an upcoming expense, or to build an emergency fund, or to simply hold cash before a larger investment – liquid funds can be a practical option. While savings accounts remain a default choice for many, there is a growing recognition of the gains of liquid funds, a category of mutual funds, that aim to provide reasonable returns while keeping risk relatively low and offering easy access to your money. AMFI data consistently shows liquid funds as a significant category within the mutual fund landscape – they witnessed an inflow of over ₹40,000 crore in May 2025. This signals a rising shift among investors towards optimising short-term surpluses.
Why should I consider liquid funds?
Liquid funds are designed for those who need a temporary home for their money, often for periods less than a year. They offer several advantages such as flexibility in capital management and high liquidity.
Unlike some other investment options, many liquid funds do not charge a penalty if you take your money out after holding it for a few days, a crucial differentiator from other fixed income products. This serves as a critical advantage for those managing unpredictable cash flows.
It’s important to remember that liquid funds are not designed for wealth creation—they serve a specific purpose of short-term cash management by prioritizing capital protection and liquidity. However, they can also play a strategic part in long-term financial planning through Systematic Transfer Plans (STPs). Liquid funds can be used for seamless transfer to other investment options within the same fund house via STPs, eliminating the need for manual transfers, streamlining the process of deploying idle cash into potentially higher-growth investments while maintaining flexibility.
How do liquid funds work?
A core part of the investment strategy for these funds is that they aim to invest in very short-term money markets and debt instruments with a maturity of up to 91 days only. Even for securities that have features like put and call options (which allow early repayment), the time remaining until they mature should not be more than 91 days. These funds generally do not invest in foreign securities or engage in activities like securities lending and borrowing, which helps maintain their relatively low risk profile.
Parag Parikh Liquid Fund: One Option to Consider
Among the various liquid fund options available, the Parag Parikh Liquid Fund (PPLF) stands out as an example that offers a compelling mix of capital protection, liquidity, and convenience — making it a strong alternative to traditional savings or current accounts. Its primary objective is capital preservation and liquidity while aiming to deliver reasonable market-related returns.
PPLF is presented as a credible alternative to traditional investment options like savings or current accounts for deploying money for short durations, offering a highly liquid option for investors. One feature worth noting is its Insta Redemption facility, which allows investors to withdraw up to ₹50,000 or 90% of their holdings (whichever is lower) in a matter of mere minutes. The redeemed amount is credited directly in your bank account through IMPS on the same day, typically within 30 minutes. This could be useful for investors who prioritize quick access to funds. For streamlined cash management, investors also benefit from access to the dedicated PPFAS CashFlex App, designed for quick and secure investments and redemptions in liquid and arbitrage funds.
In terms of performance, over the past year PPLF has delivered returns of around 6.9%, which, while not guaranteed to continue, has outpaced the average savings account interest of 3-4% as well as the FY25 inflation rate of 4.6%.
Additionally, PPLF levies no exit load after six days, providing flexibility for withdrawals. Investors in PPLF can use its proceeds to systematically transfer or switch into other schemes offered by PPFAS Mutual Fund, making it convenient for those looking to manage their investments within a single fund house.
As with any investment, it is important to do your due diligence and review the Scheme Information Document for full details on asset allocation, risks, and other specific features before making an investment decision.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.