Liquid Fund
A SEBI-categorised debt fund that invests exclusively in money-market instruments and debt securities with residual maturity of up to 91 days, offering T+1 redemption for up to ₹50,000.
A liquid fund is a SEBI-categorised open-ended debt scheme that invests only in debt and money-market instruments with a residual maturity of up to 91 days. The 91-day ceiling is a hard regulatory constraint under SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, distinguishing liquid funds from ultra-short duration funds (3–6 month Macaulay duration) and making them the shortest-duration permissible active-managed category in the SEBI framework (overnight funds being a separate, more restrictive sub-category).
Liquid funds are commonly used by corporates, treasuries, and individuals to park surplus cash for short periods — from a few days to three months — while earning a yield above savings deposits.
What sits in the portfolio
Permitted instruments include treasury bills (91-day and 182-day T-bills with ≤91 days residual), certificates of deposit (CDs), commercial paper (CP), short-dated corporate bonds, repos/reverse repos, and triparty repos (TREPs). SEBI guidelines additionally prescribe:
- No investment in debt securities with structured obligations or credit enhancements: Liquid funds cannot hold papers backed by credit-enhanced structures.
- Graded exit load: SEBI mandated a graded exit load (up to 7 days) effective 20 September 2019 to discourage speculative inflows/outflows that could destabilise NAV. For redemptions within 1 day: 0.0070%; within 7 days: 0.0045%; after 7 days: nil (indicative slab; check the SID).
- Valuation: SEBI mandates mark-to-market (MTM) valuation for instruments with residual maturity above 30 days in liquid fund portfolios, enhancing NAV accuracy.
The weighted average maturity (WAM) of a liquid fund is typically 30–70 days. Portfolio YTM closely tracks prevailing short-term money-market rates, including RBI's repo rate and the 91-day T-bill cut-off yield.
Risk profile
Liquid funds carry minimal duration risk given the 91-day cap, but carry non-trivial credit risk if the fund holds lower-rated CP or CDs. Historical stress events — the IL&FS CP defaults (2018) and DHFL CP downgrades — caused mark-downs in liquid funds holding those papers. SEBI's post-2019 mandate that liquid funds invest predominantly in T-bills and government-backed short paper reduces concentration risk, but investors should verify the credit quality distribution in the monthly factsheet. Liquidity risk is generally low given the short instrument maturities, but it can spike in systemic stress when secondary CP/CD markets seize.
Importantly, liquid funds are not equivalent to bank deposits. There is no deposit insurance (DICGC), and in extreme stress scenarios NAV can fall intra-day.
Taxation (post-Finance Act 2023)
Post-Finance Act 2023, all liquid fund gains are taxable as STCG at the investor's income tax slab rate under Section 50AA, regardless of holding period. The earlier distinction between STCG (held <36 months) and LTCG (held ≥36 months, taxed at 20% with indexation) was abolished for all debt-oriented funds. Liquid funds are therefore tax-equivalent to savings deposits or fixed deposits from a capital gains perspective.
Additionally, dividend (IDCW — Income Distribution cum Capital Withdrawal) payouts from liquid funds are added to the investor's income and taxed at slab rate. TDS of 10% applies on IDCW distributions to resident individuals where the distribution exceeds ₹5,000 per annum.
Worked example
Aditya Birla Sun Life Liquid Fund (AMFI scheme code: 119553 — illustrative; verify from amfiindia.com) maintains a portfolio of 91-day T-bills, TREP (triparty repo), and AAA-rated bank CDs. As at 31 March 2025, the fund's reported WAM was approximately 42 days and portfolio YTM was approximately 6.85%, broadly tracking the 91-day T-bill cut-off. An investor deploying ₹5 lakh for 30 days at that yield would earn approximately ₹2,822 before tax. At a 30% slab rate (plus surcharge/cess), post-tax return is approximately ₹1,975, or an annualised post-tax yield of approximately 4.80%. The redemption would settle on T+1 for amounts up to ₹50,000 (instant redemption facility per SEBI circular, 2019); amounts above ₹50,000 process on T+1 or T+2.
See also
Primary source
SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114 (6 October 2017): sebi.gov.in. SEBI Circular on graded exit load for liquid funds (2019): sebi.gov.in. Finance Act 2023, Section 50AA. AMFI scheme data: amfiindia.com. RBI 91-day T-bill cut-off series: rbi.org.in.
Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. ARN-314872. APMI APRN-01658. Content is informational and not investment advice.