How to invest in liquid funds via Coin
Liquid funds are debt mutual fund schemes that invest in money market instruments, treasury bills, commercial paper, and certificates of deposit with a residual maturity of up to 91 days. They are designed to provide returns slightly above savings account rates with near-instant liquidity, making them a popular parking ground for short-term cash.
Zerodha Coin offers direct plans of liquid funds from major AMCs at zero distribution commission, with lower expense ratios than regular plans.
Prerequisites
- An active Zerodha trading and demat account with complete KYC.
- TOTP authenticator for Zerodha two-factor login.
- UPI app or net banking access for payment.
What is a liquid fund: regulatory classification
SEBI classifies liquid funds under SEBI (Mutual Funds) Regulations, 1996 and the SEBI Master Circular for Mutual Funds. A liquid fund:
- Invests exclusively in debt and money market instruments with maturity up to 91 days.
- Is prohibited from investing in instruments with structured obligations or credit enhancements (SEBI Circular, June 2019).
- Has a risk-o-meter classification of “Low to Moderate” (formerly “Low”) following SEBI’s 2020 risk recategorisation.
- Offers an exit load of 0.0070% for redemptions within 1 day (Day 1), reducing to 0.0045% for Day 2, and 0.0000% from Day 7 onwards for most funds (graded exit load structure mandated by SEBI Circular SEBI/HO/IMD/DF4/CIR/P/2019/102).
The graded exit load structure discourages very short-term holding (under 7 days). For holding periods of 7 days or more, there is typically no exit load.
Liquid funds vs. overnight funds
Coin also offers overnight funds, which invest only in instruments maturing overnight (1 day). Overnight funds carry even lower credit risk but also typically offer slightly lower returns than liquid funds. Overnight funds have no exit load. For extremely short holding periods (1 to 3 days), an overnight fund may be more suitable due to the liquid fund’s graded exit load within 7 days.
Step-by-step procedure
Step 1: Log in to Coin
Navigate to coin.zerodha.com or open the Coin mobile app. Log in with your Zerodha client ID, password, and TOTP.
Step 2: Search for Liquid Funds
In the Coin search bar, type “liquid” to see all available liquid fund schemes. Alternatively, go to Explore > Categories > Liquid Fund on the Coin dashboard to browse liquid fund options filtered by AMC.
Step 3: Compare and select a liquid fund
On the search results or category page, review each fund’s:
- 7-day yield: A standard metric for liquid fund return comparison, as the short duration means long-period returns are influenced by credit events and not purely yield.
- 1-year return: For a relative comparison across funds.
- Expense ratio: Direct plans of liquid funds typically have TERs of 0.08% to 0.20% per annum. Lower expense ratio directly improves yield.
- AUM: Higher AUM liquid funds have better portfolio diversification and liquidity. Funds with AUM above Rs 5,000 crore are generally considered large and stable.
- Credit quality: Review the top-10 holdings. High-quality liquid funds hold predominantly AAA-rated commercial paper and government T-bills. Funds with exposure to lower-rated instruments carry higher credit risk.
- Macaulay duration: Should be very short (under 60 days for most liquid funds).
Click on a fund’s name to open its detail page for the full portfolio and returns history.
Step 4: Initiate a lump-sum purchase
Click Invest on the fund detail page to initiate a lump-sum purchase. Enter the amount. Most liquid funds accept investments starting from Rs 500 to Rs 5,000.
Click Invest to proceed to payment.
Step 5: Complete payment and note cut-off time
Liquid funds have a different NAV cut-off time than equity funds:
- Same-day NAV for purchases: Funds must be received by the AMC by 1:30 PM IST on a business day. If your payment is processed and reaches the AMC before 1:30 PM, you receive the prior business day’s NAV. If after 1:30 PM, the NAV of the current business day applies (refer to the latest SEBI Master Circular, as these rules are periodically updated).
Complete payment via UPI or net banking. For liquid funds purchased for cash parking, this cut-off timing matters if you are optimising for the earliest NAV application day.
Step 6: Verify units
After T+1 settlement, the liquid fund units appear in Portfolio > Holdings in Coin.
Step 7: Redeem when needed
To redeem liquid fund units, go to Holdings, click the liquid fund, and click Redeem. Follow the How to redeem a mutual fund on Coin procedure.
Standard redemption: Proceeds are credited to your bank account within T+1 business day.
Instant redemption: Many liquid funds on Coin offer an Instant Redemption feature, where you can receive up to Rs 50,000 or 90% of your liquid fund holding (whichever is lower) in your bank account within minutes (typically 30 minutes, though timing varies by AMC and bank). The instant redemption limit is set by SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2019/101 (June 2019). For amounts above the instant redemption limit, a standard T+1 redemption is processed for the balance.
Liquid fund exit load
SEBI mandates a graded exit load for liquid funds to discourage very short-term trading:
| Holding period | Exit load |
|---|---|
| 1 day | 0.0070% |
| 2 days | 0.0065% |
| 3 days | 0.0057% |
| 4 days | 0.0050% |
| 5 days | 0.0045% |
| 6 days | 0.0040% |
| 7 days and beyond | 0.0000% |
The exact exit load rates are as per SEBI Circular SEBI/HO/IMD/DF4/CIR/P/2019/102 and may be revised by SEBI. Check the fund’s SID for the current exit load table.
Tax treatment of liquid funds
Liquid funds are debt-oriented funds. For units purchased on or after 1 April 2023, under Finance Act 2023 (Section 50AA of the Income Tax Act), gains are taxed as short-term capital gains at your applicable income tax slab rate regardless of holding period. The indexation benefit is no longer available.
For units purchased before 1 April 2023, the grandfathering rule for LTCG may apply; consult a tax adviser for the applicable provision.
See capital gains tax in India for the full debt fund taxation framework.
Use cases for liquid funds
- Emergency fund parking: Liquid funds offer better returns than savings accounts with near-instant liquidity for amounts above Rs 50,000 (beyond the instant redemption limit, T+1 payout).
- Parking funds before equity investment: Many investors park a lump-sum in a liquid fund and deploy it into equity via an STP (Systematic Transfer Plan) to phase in the equity exposure.
- Short-term surplus: Salary surplus for the month, advance tax payments being accumulated, or funds awaiting deployment.
What can go wrong
Cut-off time missed: Purchasing after 1:30 PM IST means the prior business day’s NAV applies, not the current day’s. For very short holding periods this can affect the effective yield.
Credit event in portfolio: If a holding in the liquid fund defaults, the fund’s NAV falls sharply. This is rare for AAA-rated funds but occurred in 2019 (DHFL crisis). Stick to funds with predominantly sovereign and AAA-rated portfolios to minimise this risk.
Exit load on early redemption: Redeeming within 6 days incurs a small exit load. For cash parked for known short-term periods under 7 days, an overnight fund (no exit load) may be preferable.
Instant redemption limits: The Rs 50,000 / 90% limit applies per AMC per day. For large amounts, plan for T+1 standard redemption instead.
Related guides
- How to buy your first mutual fund on Coin
- How to invest in an index fund via Coin
- How to redeem a mutual fund on Coin
- Capital gains tax in India
- Grandfathering rule for LTCG
- Zerodha Coin overview
- Mutual funds on Zerodha (Coin)
References
- SEBI (Mutual Funds) Regulations, 1996, as amended.
- SEBI Circular SEBI/HO/IMD/DF4/CIR/P/2019/102 dated 22 August 2019 – Liquid Fund Graded Exit Load.
- SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2019/101 dated 22 August 2019 – Instant Redemption Facility in Liquid Funds.
- SEBI Master Circular for Mutual Funds (latest version on sebi.gov.in).
- Finance Act 2023 – Debt mutual fund taxation (Section 50AA).
- Income Tax Act, 1961.
- Zerodha Coin support documentation (support.zerodha.com).