Understanding Liquidity in Mutual Funds
When you invest, one of the most important questions to ask is: "How quickly can I get my money back if I need it?" This is what we call liquidity. In the context of mutual funds, liquidity refers to the ease with which an investor can convert their fund units into cash without significantly affecting the investment's value.
How Mutual Funds help in Liquidity
Unlike physical assets like real estate, which can take months to sell, mutual fund units are typically redeemable within a few business days. However, the ease of withdrawing your money depends directly on how quickly the fund can sell the underlying assets it has invested in.
- Redemption: Investors sell units back to the fund house at the applicable NAV subject to the prescribed cut-off timings.
- Systematic Withdrawal Plan (SWP): This allows for regular, fixed withdrawals, providing a steady cash flow subject to applicable NAV.
- Exchange Traded Funds (ETFs): These trade on stock exchanges like stocks, allowing for real-time liquidity during market hours.
*Open Ended schemes may offer higher liquidity since you are allowed to sell mutual fund units at the end of day NAV, whereas closed ended schemes have restrictions.
What are the factors That Influence Liquidity in Mutual Funds
While most funds are liquid, the time it takes for money to reach your bank account depends on the type of fund and the settlement cycle.
- Fund Category: Some funds, like Liquid Funds, are designed for high liquidity and often allow for quicker processing. Others, like Equity Linked Savings Schemes (ELSS), have a mandatory three-year lock-in period where the funds are not redeemable.
- Exit Loads: AMCs may charge a fee, known as an exit load, if you withdraw your money before a specific period. This fee is a percentage of the NAV and can reduce your final returns.
- Portfolio Management: Fund managers use different instruments to manage short-term liquidity within the fund, ensuring there is enough cash to meet redemption requests from investors.
Instant Redemption
For many investors looking for near instant access to liquidity, there is a feature Instant Access Facility (IAF), may also be called Insta-Redemption. This allows resident individuals with non-demat holdings to receive redemption proceeds in their bank accounts within minutes via IMPS.
However, there are specific limits to this facility. You can typically withdraw the lower of ₹50,000 or 90% of your latest investment value per day, per scheme. This feature is primarily available in Liquid and Overnight funds, making them a prudent choice for emergency reserves.
Why Liquidity Matters
Aligning a fund’s liquidity with your financial goals is crucial. For an emergency fund, you may consider high-liquidity options like overnight or liquid funds.
Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Published on Jan 9th, 2026