Ravi, a software engineer in Dubai, had AED 50,000 sitting in his Emirates NBD savings account earning barely 1%.
He wanted better returns but needed the money accessible for his planned India trip in three months. "Fixed deposits lock my money. Stocks are too risky for such a short period," he told us.
We suggested liquid funds. Three months later, his corpus had grown by nearly 1.8% with zero hassle.
At Belong, we've guided hundreds of NRIs like Ravi toward smarter short-term parking options. Here's everything you need to know about liquid funds.
What Exactly Are Liquid Funds?
Liquid funds are debt mutual funds that invest only in very short-term instruments.
Think treasury bills, commercial papers, and certificates of deposit that mature within 91 days. This ultra-short maturity is what makes them "liquid" and safe.
When you invest, your money goes into high-quality debt instruments rated AAA or A1+ by credit agencies like CRISIL.
The fund manager diversifies across multiple issuers to spread risk. Unlike equity funds where prices swing daily, liquid fund NAVs move steadily upward.
The key difference from regular debt funds? Liquid funds focus exclusively on securities maturing within 91 days, minimizing both interest rate risk and credit risk.
Why NRIs Are Choosing Liquid Funds Over Savings Accounts
Your UAE savings account probably pays 1-2% annually. An NRE savings account in India offers around 3-4%. Liquid funds deliver 6.5-7.5% returns according to Groww's December 2025 data.
That's nearly double what traditional bank accounts offer.
Option | Expected Returns | Liquidity |
|---|---|---|
UAE Savings Account | 1-2% | Instant |
NRE Savings Account | 3-4% | Instant |
Liquid Funds | 6.5-7.5% | T+1 (one business day) |
The trade-off? You wait one business day to access your money instead of instant withdrawal. For most NRIs, this minor delay is worth the extra 3-4% returns.
👉 Tip: Liquid funds work best for money you won't need for at least 7 days. Some funds charge a small exit load for redemptions within 7 days.
How Liquid Funds Are Taxed for NRIs
Here's where things get important. The Finance Act 2023 changed debt fund taxation significantly.
For investments made after April 1, 2023: All gains are treated as Short-Term Capital Gains (STCG), regardless of how long you hold. They're taxed at your income tax slab rate. The indexation benefit that made debt funds attractive earlier? Gone.
TDS for NRIs: When you redeem, the fund house deducts 30% TDS on your gains as per Section 195. If your actual tax liability is lower, you can claim a refund when filing your ITR.
Example: You invest ₹10 lakhs and earn ₹50,000 in gains over 6 months. The fund house deducts ₹15,000 as TDS (30% of gains). If you fall in the 20% tax bracket, your actual liability is only ₹10,000. You claim ₹5,000 as refund when filing returns.
👉 Tip: UAE has a DTAA with India. While it doesn't reduce debt fund TDS rates, it ensures you don't pay tax twice on the same income.
Top Performing Liquid Funds in 2025
Based on Scripbox analysis and AUM data, here are consistent performers:
Fund Name | 3-Year Return | AUM (₹ Cr) | Expense Ratio |
|---|---|---|---|
ICICI Prudential Liquid Fund | 7.1% | 45,629 | 0.20% |
Aditya Birla SL Liquid Fund | 7.15% | 49,721 | 0.20% |
Axis Liquid Fund | 7.13% | 37,122 | 0.15% |
Nippon India Liquid Fund | 7.1% | 30,230 | 0.20% |
All these funds invest primarily in AAA-rated instruments. Their large AUM ensures liquidity even during market stress. Low expense ratios (0.15-0.20%) mean more of your returns stay with you.
Liquid Funds vs NRE Fixed Deposits
Many NRIs default to NRE fixed deposits for short-term parking. Here's how they compare:
Liquidity: FDs lock your money. Breaking them early means penalty. Liquid funds? Redeem anytime, money in your account within one business day.
Returns: Top NRE FD rates currently range from 6.5-7.25% for 1-year tenures. Liquid funds deliver similar returns (6.5-7.5%) without the lock-in.
Taxation: NRE FD interest is tax-free in India. Liquid fund gains are taxable at your slab rate with 30% TDS upfront.
Verdict: If you're certain about your investment timeline and want zero tax, NRE FDs win. If you need flexibility and can manage the tax paperwork, liquid funds offer comparable returns with instant access.
👉 Tip: Consider splitting your corpus. Keep 6 months' expenses in NRE FDs for emergencies. Park surplus in liquid funds for better flexibility.
How NRIs Can Start Investing
The process is straightforward if you already have Indian banking set up.
Step 1: Ensure Your NRI Account is Active You need an NRE or NRO account to invest. NRE investments are fully repatriable. NRO investments have the $1 million annual repatriation limit.
Step 2: Complete Your KYC Mutual fund KYC is now largely digital. You'll need your PAN, passport, visa copy, and overseas address proof. Most AMCs accept video KYC for NRIs.
Step 3: Choose Direct or Regular Plans Direct plans have lower expense ratios (0.1-0.2% vs 0.5-1% for regular). The difference adds up over time. We recommend direct plans if you're comfortable managing investments yourself.
Step 4: Invest via AMC Website or Platform Visit the fund house website directly or use aggregator platforms. Link your NRE/NRO account, transfer funds, and invest.
Important for US/Canada NRIs: Many fund houses don't accept investments from US and Canada residents due to FATCA compliance. Check with the AMC before starting.
When Should You Use Liquid Funds?
Emergency fund building: Park 3-6 months of expenses where they earn better than a savings account but remain accessible.
Waiting to invest: Have a lump sum ready for equity mutual funds but markets look overheated? Park in liquid funds while you wait.
Short-term goals: Planning a trip to India? Need funds for a family event in 3-6 months? Liquid funds beat savings accounts.
Between jobs: Moving back to India? Park your gratuity and end-of-service benefits in liquid funds while you figure out longer-term investments.
Risks You Should Know About
Liquid funds are low-risk, not no-risk.
Credit Risk: If an issuer defaults, the fund's NAV can drop. The 2019 IL\&FS crisis taught investors this lesson. Stick to funds with high-quality portfolios.
Interest Rate Risk: Minimal in liquid funds due to short maturities, but still present. A sudden rate hike can slightly impact returns.
Not FDIC-Insured: Unlike bank deposits, mutual fund investments aren't guaranteed. However, SEBI regulations ensure tight quality controls.
👉 Tip: Check the fund's portfolio composition before investing. Funds with 90%+ in government securities and AAA-rated papers are safest.
Your Next Move
Liquid funds offer NRIs a smarter way to park short-term money. You get double the returns of a savings account with nearly the same accessibility. The tax paperwork is manageable, especially if you're already filing Indian tax returns.
Start small. Park your next bonus or surplus income in a liquid fund and experience the difference yourself.
Want to discuss which option suits your situation? Join our WhatsApp community where 15,000+ NRIs share experiences and strategies daily. Or download the Belong app to compare all your India investment options in one place.
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