Best liquid funds in 2019

Liquid funds are an important avenue to park short term funds and they offer returns and are more tax efficient compared to bank deposits.

December 12, 2019 8:50 IST | India Infoline News Service
Liquid funds are technically debt funds; just that they are at the lower end of the duration spectrum. As a result, the risk and the returns on liquid funds are also relatively much lower compared to other categories of debt funds. Liquid funds predominantly invest in treasury bills, CD, call money, commercial papers, and other debt instruments with maturities up to 90 days. Liquid funds have no restrictions of a lock-in period and come without exit load as they are a near-cash product. Liquid funds have lowest interest risk due to the short maturity. Liquid funds are an important avenue to park short term funds and they offer returns and are more tax efficient compared to bank deposits.
Best liquid funds 2019 – Ranking on 5 year returns
To identify the best liquid funds to invest in, we have considered 1 year, 3 year and 5 year returns. While liquid funds are for the short term, it is important to see their consistency of performance across time frames to judge which is more predictable. Here are the best liquid funds on sustainable returns and you can select top 5 liquid funds based on a mix of criteria.
Fund Name 1-Year Returns (%) 3-Year Returns (%) 5-Year Returns (%)
Quant Liquid Plan (G) 7.23% 6.99% 7.60%
PGIM Insta Cash Fund (G) 6.88% 6.98% 7.43%
JM Liquid Fund (G) 6.76% 6.95% 7.43%
Baroda Liquid Plan (G) 6.78% 6.95% 7.42%
Indiabulls Liquid Plan (G) 6.70% 6.90% 7.42%
Aditya Birla Sun Life Liquid (G) 6.84% 6.95% 7.66%
Nippon India Liquid Fund (G) 6.86% 6.97% 7.41%
Axis Liquid Fund (G) 6.78% 6.96% 7.40%
Tata Liquid Fund (G) 6.73% 6.93% 7.38%
HSBC Cash Fund (G) 6.82% 6.95% 7.37%
Data Source: Morningstar
If you look at the top 10 funds on 5-year CAGR returns, there is not much to choose in terms of returns and also in terms of consistency. This list allows investors to choose top 5 liquid funds of their choice.
Evaluating liquid funds – beyond returns
While the comparison of funds on relative returns is a good starting point, you can ratify your decision based on the following additional factors.
Consistency and benchmarking
Once you have seen the absolute performance, also look at the consistency across different time frames. Wide fluctuations are not a good sign, although the chances are low in liquid funds. Funds that deliver consistent returns are more predictable. Also, benchmark with the liquid index! Ideally, the liquid fund should also be able to outperform the liquid ETFs, which is a good low risk and low cost benchmark.
Specific fund characteristics
Here, the role of the AMC and the fund portfolio come in handy. In the last few months, the portfolio of liquid funds has come under a lot of scrutiny and regulation by SEBI. This is more so, after specific cases like IL&FS and DHFL. Apart from looking at the performance in absolute terms and the benchmarking, one must also look at the pedigree of the fund house. Larger the corpus, it is better to get economies of scale and the cost is also relatively lower. Avoid liquid funds if the scheme has seen a high degree of churn in the fund management team in the recent past.
Expense Ratio and how it impacts returns
Expense ratio indicates the operating efficiency of a mutual fund scheme. It shows how much of your investment is used to manage the expenses of the fund. Liquid funds have one of the lowest expense ratios but the expense ratio is still higher than a liquid ETF. That is what you need to actually benchmark against. Choose a fund with a lower expense ratio, which can give you better performance. In fact, the choice of direct plans can make a substantive difference in case of liquid funds.
Liquid funds – who is the target investor?
Liquid funds are a great liquidity management tool as they offer low default risk and also negligible interest rate risk. Due to their relatively higher returns and tax efficiency, liquid funds have emerged as a better option compared to bank deposits. However, investors should not invest their entire emergency corpus in liquid funds as redemption of the funds will credit the money only on the next working day. Liquid fund returns range from 6-7% in pre tax terms for most funds. In case you need regular income from liquid funds, prefer a growth plan with SWP option than a dividend plan. The DDT makes the dividend plan extremely unfriendly for the investor.

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