Wealth  Management  Services

Selecting The Best Liquid Mutual Fund

August 24, 2020

Honestly, there is very little to choose between two liquid funds – pick up two good liquid funds and compare their returns, you’ll find a difference of a few basis points that will mostly not matter to you.

But no one invests in liquid funds to earn spectacular returns. The most important ask of any liquid fund investor is safety of capital. And hence, we will assess the universe of liquid funds accordingly to pick a few winners.

Parameter Number 1: Past Track Record

Fund performance plays a significant role in the selection of relevant funds. Choose the funds that have outperformed their benchmark and peer funds delivering consistent returns over different time horizons. Having said that, in the past 2 years 95% of the funds have a return between 6 % to 6.5 %. Hence returns for liquid funds are in a very close range and even if on does not pick the “best” they are not very far off from the highest or average return.

As of July 2020
Scheme Name3Y Returns
Aditya Birla Sun Life Liquid Fund 6.54%
Nippon India Liquid Fund 6.54%
Axis Liquid Fund6.53%
ICICI Prudential Liquid Fund 6.49%
SBI Liquid Fund 6.39%
Kotak Liquid Fund6.39%
HDFC Liquid Fund6.35%

Parameter Number 2: Large AUM


Experts advise to invest in mutual funds that doesn’t have a large AUM and avoid the large AUM mutual funds. And they are not wrong!

However, refraining from investing in mutual funds with large AUM is applicable by and large to equity mutual funds and within equity mutual funds to mid and small cap funds the most.

Mid and small cap funds with large AUM will always find it more difficult to find good investment options than mutual funds with a smaller AUM.

When it comes to liquid funds, however, large AUM is a very important and desirable criterion.

Liquid funds invest in securities that have a fixed maturity (up to 90 days). If many investors put up a redemption request from the liquid fund, the fund manager will have to prematurely withdraw from securities, and this will adversely impact returns for all investors!

While liquid funds generally have cash ready for scenarios like these, if the redemption pressure is beyond a certain point, the returns of the liquid fund will be adversely impacted.

For this reason, you should choose liquid funds that are large. These can handle redemption pressures better than liquid funds with smaller AUMs.

As a rule of thumb, you should invest in a liquid fund which has an AUM of at least Rs. 25,000 crores.

Only the following liquid funds have an AUM of Rs. 25,000 or greater –

As of July, 2020
Scheme NameAUM (Cr)
HDFC Liquid Fund - Growth1,10,633.37
ICICI Prudential Liquid Fund - Growth57,334.70
SBI Liquid Fund - Growth50,761.50
Aditya Birla Sun Life Liquid Fund - Growth36,679.33
Kotak Liquid - Regular Plan - Growth32,359.61
Nippon India Liquid Fund - Growth31,728.04
Axis Liquid Fund - Growth27,032.12

We will assess these funds further as per other parameters.

Parameter 3: AAA Credit Quality (as percentage of total AuM)

If you are looking at liquid funds, you are looking for safety and protection of your capital.

Your capital will be the safest if it is loaned out to the most creditworthy borrowers.

An absolute no-brainer!

This is also the reason SEBI recently mandated mutual funds to invest not more 5% in unlisted or to-be-list equity and debt securities. This is a drastic change from the 25% threshold that applied earlier. But since the percentage is now negligible, this criterion can be eliminated from our screening. Nonetheless, it was important to mention the same.

Parameter 4: Low Expense Ratio

When it comes to liquid funds, there is not a whole lot to do for the fund manager(s). For this reason, the expense ratios are substantially lower than those of equity funds. Generally, greater than 1.5% for equity funds and less than 0.3% for liquid funds.

In liquid funds, however, the returns are in a very narrow range 6.5%- 7 % (historically). Assume there are two funds that have expense ratios of 0.1% and 0.3%. By investing in a fund with an expense ratio of 0.1% you would have increased your returns by 0.2% by simply choosing to invest in it over the other!

Although, these are just a few basis points for retail investors however, for large investors where a few basis points translate to lakhs or crores of rupees! But again, it would be pointless to invest in a badly managed liquid fund just because the expense ratio is lower.

Here the total expense ratios of the funds that have passed the first two criteria –

As of July, 2020
Scheme NameExpense Ratio
SBI Liquid Fund – Growth0.22%
Axis Liquid Fund – Growth0.22%
Kotak Liquid - Regular Plan - Growth0.25%
Nippon India Liquid Fund - Growth0.27%
HDFC Liquid Fund – Growth0.30%
Aditya Birla Sun Life Liquid Fund - Growth0.30%
ICICI Prudential Liquid Fund - Growth0.32%


Thus, with one of the lowest expense ratios, third highest AUM Size & decent returns SBI is the first among our selections & Axis comes a close second since even though it’s AUM is half the size of SBI, the 14 basis point return difference is more than enough to make up for it.

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