How Finology Selects Best Liquid Funds For 2025

Liquid mutual funds are a popular choice for investors seeking a secure way to park their surplus funds for a short duration. In this blog, we'll explore the fundamentals of liquid funds, their benefits, and the process for evaluating safe liquid fund options.

Stability becomes more important than anything when you are investing for your goals. Even while picking stocks for Finology 30, we choose stocks that you can rely on for the long term.

 

Liquid Mutual Funds: What Are They?

Debt mutual funds that invest in short-term fixed-income securities with a 91-day maturity are known as liquid funds. Usually, these consist of:

• Treasury Bills (T-bills): Issued by the government, these securities are regarded as having very low risk because of their short maturity periods and sovereign backing.
• Certificates of deposit (CDs): Issued by banks, these are a little riskier than T-bills but generally safe.
• Commercial Paper: A short-term debt instrument issued by corporations, which is safe when backed by companies with good credit ratings

Liquid funds are particularly attractive to risk-averse investors who want to park idle cash for a short duration (1–3 months) while earning higher returns than savings or current accounts.

Why Liquid Funds Are Attractive?

Liquid funds typically offer returns in the range of 6–7% per annum, compared to 3.5–4% on savings accounts and 0% on current accounts. Their negligible exit penalties (as low as 0.0045%) make them a flexible option for short-term financial goals. When compared to fixed deposits (FDs), liquid funds offer better liquidity and lower penalties for early withdrawals.

Why Choose Liquid Funds?

Liquid funds are ideal for individuals and businesses looking to optimise the returns on their idle cash without compromising on liquidity or safety. They are particularly useful for short-term goals, providing a balance of security, flexibility, and relatively higher returns.

Our analysis underscores the importance of research and careful fund selection to align investments with financial goals. Whether you're an experienced investor or new to mutual funds, liquid funds can serve as a reliable addition to your portfolio for short-term needs.

How We Screened Liquid Funds?

To identify the safest liquid funds, we went for a two-step process. Safety and capital preservation were always prioritised over returns, which is the core purpose of liquid funds.

Step 1: Screening Based on Expense Ratios

We analysed a total of 36 liquid funds and eliminated those with expense ratios higher than the category average of 0.15%. This process narrowed down our selection to 20 funds.

Step 2: Analyzing Portfolio Allocation

Using their fund factsheets, we saw the remaining funds' portfolio allocations. We believe funds with a significant share of government securities, T-Bills, and similar instruments are the safest. On average, the shortlisted funds allocated around 18% of their portfolios to government securities. Nine funds exceeded this average, making them the strongest candidates.

While we have disclosed the final fund that we selected in the free report section, it stood out by allocating over 40% of its portfolio to government securities. This focus on safety ensured that the chosen fund met the parameters we had set.

Invest wisely, and remember: the safety of your capital is paramount when choosing liquid funds. Stay informed and make choices that suit your financial strategy.

We have revealed our choice of large & mid-cap funds for 2025 in Recipe’s Free Reports section. Stay tuned!