How to choose a liquid fund

By Morningstar |  22-06-18 | 

How must I choose the best liquid fund? What parameters should I check?

- Prakash

I am looking to invest my emergency fund in a liquid fund. Could you please advise what are the best and low risk funds for this?

- Vallinayagam

Liquid funds come with constrained investment mandates, whereby they can only purchase instruments with maturities up to 91 days.

While that makes them the least volatile fund category around, which also means there is limited differentiation between liquid funds from various Asset Management Companies, or AMCs.

Having said that, here are a few things you could look at:

  • Expense Ratio. Even a 5-10 bps difference in expenses could be meaningful in liquid funds
  • Pedigree of AMC: Look to invest in liquid funds of well managed and established AMCs

Liquid funds are used by investors for different purposes. Some use them as a means for parking money that they may need during an emergency. Others park money here and do a periodic transfer (STP) into an equity fund. If that is your objective, then the equity funds you select will decide the appropriate liquid fund to invest into.

We have a tool on our website which enables you to see the best performers in all categories. They can then be ranked according to various return parameters; 1 year, 3 years, 5 years and 10 years. Even shorter time periods are available. A host of other details are also provided which can help you further rank them.

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