Liquid fund
Also written Liquid scheme
An open-ended debt scheme investing only in debt and money market securities maturing within 91 days — among the lowest-risk mutual funds, used to park short-term surplus money.
In plain language
A liquid fund is an open-ended liquid scheme whose investment is in debt and money market securities with maturity of up to 91 days only.
Because everything it holds matures within three months, the value of its portfolio barely reacts to interest rate changes — interest rate risk is very low. Money market securities also carry high credit ratings, so credit risk is very low too. The workbook therefore counts liquid funds among the lowest-risk funds in the mutual fund universe.
That profile decides their use. Distributors recommend them for short-term parking of surplus money, especially when the money is available for a short but uncertain period. They are also the usual starting point of a Systematic Transfer Plan — money is parked in a liquid fund and transferred into equity funds at regular intervals.
Liquid funds get their own operating rules on cut-off times, NAV calculation and instant redemption, because investors use them for money they may need within days.
How it works
Liquid fund against money market fund:
| Liquid fund | Money market fund | |
|---|---|---|
| Invests in | Debt and money market securities | Money market instruments |
| Maturity | Up to 91 days | Up to 1 year |
NAV and cut-offs. Mutual funds calculate NAV for each calendar day for liquid schemes, and declare it on Sundays and holidays too. The cut-off for purchases and switch-ins is 1.30 pm:
| Purchase situation | Applicable NAV |
|---|---|
| Application by 1.30 pm, funds available before cut-off | Closing NAV of the day immediately preceding the day of receipt |
| Application after 1.30 pm, funds available the same day | Closing NAV of the day immediately preceding the next business day |
| Funds not available before cut-off | Closing NAV of the day immediately preceding the day funds become available |
For redemptions and switch-outs the cut-off is 3.00 pm: before it, the NAV of the day immediately preceding the next business day; after it, the next business day's NAV.
Instant Access Facility (IAF). Mutual funds may offer IAF only in liquid schemes. It credits redemption proceeds the same day, up to Rs 50,000 or 90 per cent of the latest value of the investment, whichever is lower, per day, per scheme, per investor. The price is the lower of two NAVs — before cut-off, the previous calendar day's and the day of application; after cut-off, the day of application's and the next calendar day's.
Advertising. For overnight, liquid and money market funds, performance may be advertised by simple annualisation of yields if figures are available for at least 7, 15 and 30 days.
The workbook's redemption example conflicts with its own table. In a week where Tuesday is a holiday, it says a liquid fund redemption submitted on Monday before cut-off gets Sunday's NAV. The table's rule — NAV of the day immediately preceding the next business day (Wednesday) — gives Tuesday's NAV. Learn the table rule, and recognise that the example states Sunday.
A worked example
Rahul receives a Rs 4,00,000 bonus and will pay a car dealer in about six weeks, on a date not yet fixed. He parks it in a liquid fund. Figures are illustrative.
Buying. He transfers money at 11.00 am on Thursday, a business day, and applies online at 11.15 am. Funds are available before 1.30 pm, so he gets Wednesday's closing NAV — the day immediately preceding receipt. At Rs 2,500.0000 that is 159.992 units after stamp duty of Rs 20 (Rs 3,99,980 ÷ 2,500).
An emergency. Ten days later his father is hospitalised and he needs cash at once. Through the Instant Access Facility he can take the lower of:
Rs 50,000
90% of latest value = 90% × 4,01,600 = Rs 3,61,440
→ Instant limit = Rs 50,000
The Rs 50,000 reaches his account the same day. The rest must go through a normal redemption.
Why not a savings account? It could have been — but a liquid fund keeps the money in very short-maturity, highly rated instruments while he waits. Why not an equity fund? Six weeks is far too short a horizon for an asset that fluctuates a lot. The liquid fund's low interest rate risk and low credit risk are what match an uncertain, short-term need.
Why NISM asks about it
Chapter 4 (Mutual Fund Products for the New Cadre of Distributors), section 4.2, defines liquid and money market funds and their risk profile; Chapter 2 gives the SEBI category definition; Chapter 9, sections 9.8 and 9.9, carries the Instant Access Facility and the cut-off table with its worked week; Chapter 10 has the advertising rule. Expect the 91-day definition, the 1.30 pm purchase cut-off, the IAF limit, and a business-day NAV scenario.
Common exam traps
- Liquid fund: maturity up to 91 days. Money market fund: up to 1 year.
- Purchase cut-off 1.30 pm; redemption cut-off 3.00 pm for liquid funds.
- NAV is calculated for every calendar day, including Sundays and holidays.
- IAF only in liquid schemes: lower of Rs 50,000 or 90% of latest value, per day per scheme per investor, at the lower of two NAVs.
- Low interest rate risk and low credit risk — but not zero risk.
- Redemption NAV before cut-off: the table says the day immediately preceding the next business day; the workbook's Monday example says Sunday's NAV even though Tuesday is a non-business day. Expect the table rule in a rule-based question.
- Cut-off timings do not apply to NFOs or international schemes.
Where this is taught
- Series V-D · Chapter 12: Mutual Fund Scheme Selectionintroduced here
- Series XVII · Chapter 2: Financial Markets & Investment Productsintroduced here
- Series V-B · Chapter 4: Mutual fund products for the new cadre of distributorsintroduced here
- Series X-A · Chapter 11: Mutual Fundintroduced here
Related terms
- Interest rate riskThe risk that an investor in a debt instrument loses return because rates rise — existing instruments carrying the old, lower coupon fall in value until their yield matches the new market rate.
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Official Point of AcceptanceA location a mutual fund has formally designated to receive transaction requests, where the application is time-stamped — and that stamp, not the moment the investor handed the form over, decides which NAV applies.
- Stamp dutyA levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Target Maturity FundA debt mutual fund designed to mature on a specific date, holding bonds that mature around the same time — minimising reinvestment risk and giving a more predictable return to a defined horizon.
- Money market or liquid fundThe workbook's own mutual fund category investing in short-term liquid instruments such as Treasury Bills and Commercial Paper, the category most likely to fall into taxation as a Specified Mutual Fund.
- Fixed Maturity PlanA close-ended debt scheme whose portfolio maturity is aligned to the scheme's own maturity date, so the investor who stays to the end has a reasonably visible outcome — though never a guaranteed one.
- Ultimate Beneficial OwnerThe natural person who ultimately owns or controls a non-individual investor — over 25% of a company, over 15% of a partnership, or 15% or more of a trust's benefits — whose identity a mutual fund must verify.
- Unclaimed amountsDividend and redemption money a mutual fund investor never collected, held in a separate liquid plan — paid at prevailing NAV if claimed within 3 years, at the 3-year NAV if claimed later.
- Credit risk fundAn open-ended debt scheme investing at least 65% of total assets in corporate bonds rated AA or below (excluding AA+) — accepting higher credit risk in pursuit of higher yields.
- Arbitrage fundA mutual fund that buys in the cash market and simultaneously sells in the futures market to lock in the price difference, giving low NAV volatility similar to a liquid fund.
- New cadre of distributorsA limited class of mutual fund distributors SEBI allowed from 2012 — postal agents and retired government or bank officers among them — who may sell only five kinds of simple and performing schemes.