Hello investors, in this blog, we will discuss the best liquid fund for 2025.
Look, liquid funds are a category in which people often get confused — whether to keep money in savings, invest in an FD, or opt for a liquid fund.
What are the differences between these three? When should you invest in a liquid fund?
In this blog, we will not only recommend the best liquid fund from our perspective, but we will also explain when a liquid fund is suitable for you.
When is a Liquid Fund Suitable?
Now, when we need to save money for a month or two to three months, we often put it in a savings account.
In a savings account, we typically earn interest rates of 2–4%.
We cannot do FD because, in short-term FDs — even in 15-day or one-month FDs — the interest rate is very low, around the savings level.
And if I do an FD and need the money earlier, there will be a penalty of 1–2% on premature withdrawal. I incur a loss.
Sometimes, we don’t even know when exactly we’ll need the money.
We know it’s coming up soon, but it could be in a month, two, or three — and the money lies idle in the meantime.
So what should I do?
Why Not Auto-Sweep?
An alternative to this is sometimes auto sweep, but:
- Auto sweep leads to accounting complications.
- Complex concepts, such as LIFO/FIFO (Last In, First Out/First In, First Out), apply.
- We are not able to calculate our returns properly.
- Often, the return ends up being very low because of how LIFO/FIFO is considered.
That’s not an ideal solution if there’s a lot of frequency involved.
And then there’s the tax angle, too.
In such a case, a liquid fund comes out to be a good option if you:
- Have to keep money for 2 to 4 months
- Do not know exactly when you’ll need it
- Need it to stay liquid — withdrawable in one or two days
- Want better returns than savings
- Don’t want to compromise too much on safety
You need a highly safe way to get higher returns than a savings account.
What is a Liquid Fund?
See, Liquid funds mostly invest in debt instruments with a maturity of 91 days or less.
This does not mean that your redemption should be within 91 days — the fund is investing in instruments that mature in 91 days.
You can keep money in it for years as well — although you shouldn’t — but you can.
If you don’t withdraw the money, the liquid fund will sell matured instruments and buy new ones, keeping your cash continuously invested.
What Do Liquid Funds Invest In?
There are three major types of investments in liquid funds:
- Treasury Bills
- Issued by the government
- Considered very safe
- Certificates of Deposit (CDs)
- Issued by banks
- It is also considered safe, though riskier than government securities.
- Commercial Paper
- Issued by corporate entities (e.g., Tata)
- More risky, but offers higher returns
FD vs Liquid Fund: Clear Differences
Let’s understand the clear difference between FD and liquid fund:
- Liquid funds are more flexible — you can withdraw today, money will be in your account tomorrow
- In FDs, there’s a premature withdrawal penalty (0.5% to 2%)
If you haven’t decided when you need the money, you can’t choose the right FD duration.
- In such cases, liquid funds are better.
Also, there is a difference in purpose:
- Liquid funds: for short-term needs
- FDs: for keeping wealth safe long-term
How We Selected the Best Liquid Fund
Now we come to how we selected our best liquid fund and which fund it is. Because liquid fund returns are not very high (not 15%, like equity), the expense ratio becomes very important.
Step 1: Expense Ratio Filter
- There were a total of 36 liquid funds.
- We first filtered funds whose expense ratio is lower than the category average
- Category average = 0.15%
- All funds charging more than this were removed
- 16 funds were eliminated, 20 funds remained
Step 2: Safety Consideration
Safety is most important in liquid funds.
- Government securities = safest
- Bank CDs = moderately safe
- Corporate commercial papers = most risky
If you want maximum returns, you give more allocation to corporate papers — but:
People invest in liquid funds not for high returns but for:
- High safety
- Better than savings returns
So, we focused on safety, track record, reputation, risk profile, and overall long-term performance.
Our Recommendation: Quantum Liquid Fund – Direct Plan
We chose:
Quantum Liquid Fund – Direct Plan
Why?
- Quantum AMC focuses on asset management, not asset gathering
- Similar to Parag Parikh AMC
- Highly respected, conservative
- You won’t find them in the news or top return charts — because they are too safe.
- But liquid funds are a category where this safety-first approach is ideal.
Key Stat: Government Security Allocation
- Out of all 36 funds, this fund had the highest allocation — 42% — to government securities.
- That means almost half the money is in the safest instruments.
- This shows a strong safety-oriented approach, which is very important in liquid funds.
Conclusion
Liquid funds are regarded as a good investment option for those who want to park their money for a short term, such as 1-5 months, without compromising on liquidity and safety. It offers better, potentially higher returns and flexibility with relatively low risk.