Why Liquid Funds is a Best Investment Choice for NRIs

Are you looking for a safe investment option in India that offers better returns than your savings account while keeping your money accessible when you need it?

These specialized debt mutual funds invest in money-market and debt instruments with maturity periods of up to 91 days, making them a low-risk investment option for non-resident Indians (NRIs) managing finances across borders.

Unlike Fixed Deposits that lock away your money for extended periods, liquid funds allow you to redeem your investments within 24 hours or one working day. This flexibility proves invaluable during emergencies when you need quick access to funds.

As an NRI, you can invest in these mutual funds in India, with investment proceeds being fully repatriable when made through an NRE account. This repatriability feature addresses a key concern for non-resident investors managing cross-border financial obligations.

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What Are Liquid Funds?

A liquid fund is a specialized category of debt mutual funds that invests in short-term financial instruments with maturities of up to 91 days. These funds provide a balance between safety, returns, and accessibility for NRIs managing funds across borders.

When you invest in a liquid fund, your money goes into high-quality debt instruments such as Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), and Collateralized Lending and Borrowing Obligations (CBLO). The primary objective is to preserve capital while providing reasonable returns and maintaining high liquidity.

Liquid funds focus on ultra-short-term securities. Fund managers ensure the average maturity of securities in the portfolio remains up to 3 months, which significantly reduces both interest rate risk and credit risk compared to other investment options.

Liquid funds operate differently from other mutual funds in several key aspects:

• NAV Calculation: The Net Asset Value of liquid funds is calculated for 365 days, unlike other debt funds, which calculate NAV only on business days.
• Redemption Speed: Withdrawals are typically processed within 24 hours on a T+1 basis (next business day), with some funds even offering instant redemption.
• Risk Profile: They carry the lowest interest-rate risk in the debt funds category due to their short maturity period.

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How are Liquid Mutual Funds Taxed?

Liquid mutual funds in India are classified as debt mutual funds. As per the latest tax rules effective from April 1, 2023, all capital gains from these funds, regardless of the holding period, are treated as short-term capital gains and are taxed at the investor’s applicable income tax slab rate. There is no benefit of indexation or long-term capital gains tax treatment for units purchased on or after this date.

If you opt for the dividend option, dividends are added to your total income and taxed as per your slab. Additionally, TDS at 10% is applicable on dividend payouts exceeding ₹5,000 in a financial year.

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Tax Implications for NRIs

For NRIs, the taxation rules are the same as for residents, but TDS (Tax Deducted at Source) is applicable at the time of redemption:

• Capital gains from liquid fund redemptions are subject to TDS at 30%, since they are treated as short-term gains under Section 115A.
• Dividends paid to NRIs are subject to TDS at 20%, if the annual amount exceeds ₹5,000.
• NRIs can claim excess TDS by filing an Indian income-tax return.
• Investment must be made through NRE or NRO accounts under FEMA regulations.
• DTAA (Double Taxation Avoidance Agreement) benefits may apply and can reduce your TDS liability if the relevant documentation is submitted in time.

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Benefits Of Liquid Funds For NRIs

Liquid funds offer several advantages that address the unique financial challenges faced by non-resident Indians managing investments across borders.

• Higher Returns: These funds typically provide returns between 7–8%, considerably outperforming traditional savings accounts. This makes them an efficient option for NRIs looking to generate better returns on idle money while maintaining accessibility.
• Quick Access to Funds: Redemption requests are generally processed within a single working day, ensuring funds availability when you need them. Many liquid funds offer instant redemption facilities for withdrawals up to ₹50,000 per day, making them suitable for urgent financial requirements.
• Low Risk Profile: Liquid funds stand out as one of the safest mutual fund categories. The short lending tenure minimizes volatility, keeping the Net Asset Value (NAV) relatively stable compared to other debt funds. After investing for at least a month, there's almost no possibility of losing money.
• Emergency Fund Solution: Liquid funds serve as excellent emergency fund vehicles for NRIs. Their combination of stability, accessibility, and reasonable returns makes them ideal for setting aside money for unforeseen expenses. You can invest through your NRE account to ensure redemption proceeds remain easily repatriable—a crucial consideration when managing finances across borders.

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Why Liquid Funds Are Ideal for NRIs

Living abroad exposes you to currency volatility and unpredictable cash needs—liquid funds are tailored to address both. By investing in high-quality, short-duration debt instruments, these funds deliver returns that often outpace NRE fixed deposits and savings accounts by 50–100%, all while allowing unrestricted repatriation. Their next-day redemption feature ensures you can quickly convert holdings back to cash or move into equity opportunities.

Beyond serving as a superior parking lot for surplus capital, liquid funds double as your emergency safety net and your gateway to higher-risk, higher-reward portfolios. With just 7 days lock-in periods with exit loads, you retain full control over timing and allocation, seamlessly shifting funds between different currency exposures or market segments. This blend of capital preservation, competitive yield, and unparalleled flexibility makes liquid funds an indispensable building block in any cross-border investment strategy.

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How to Start Investing in Liquid Funds as an NRI

The process of investing in liquid funds as an NRI involves several straightforward steps that you can complete from abroad.

Step 1: Set Up Your Bank Account
You must establish either a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account with an Indian bank. The NRE account converts your foreign currency earnings to Indian rupees, while an NRO account manages income earned within India. Mutual fund companies in India cannot accept foreign currency investments, making this step essential.

Step 2: Complete Your KYC Process
The Know Your Customer (KYC) process is mandatory for all mutual fund investors. You will need to provide:

• Passport-sized photographs
• Self-attested passport copies (relevant pages only)
• Address proof (overseas identity proof)
• Birth certificate
• Canceled cheque or bank statement
• FATCA declaration

Step 3: Choose Your Investment Platform
Once your KYC is complete and your bank account is verified, you can invest through iNRI.

Special Considerations for US and Canadian NRIs:
NRIs from the USA and Canada may face additional requirements or restrictions under FATCA. However, several fund houses accept investments from these countries, including Aditya Birla Sun Life, ICICI Prudential, and SBI Mutual Fund. Redemption procedures vary by fund house, with proceeds credited to your NRE/NRO account after applicable tax deductions.

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Conclusion

Liquid funds provide NRIs with a superior alternative to traditional savings accounts and fixed deposits by combining competitive returns with unfettered access to your capital. They have a 7 day lock-in structure and absence of exit penalties (after 7 days) ensure you can reallocate funds instantly as opportunities arise, whether it’s seeding an equity position or covering unexpected expenses. Beyond simply parking surplus cash, liquid funds serve as an effective bridge between short-term liquidity needs and longer-term investment goals striking the optimal balance of safety, yield, and accessibility for NRIs managing finances across geographies.

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Frequently Asked Questions

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Q1. Are NRIs allowed to invest in liquid funds in India?
Yes, Non-Resident Indians (NRIs) can invest in liquid funds in India. These funds are part of the mutual fund options available to NRIs, allowing them to invest in debt instruments with short-term maturities.

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Q2. What advantages do liquid funds offer over fixed deposits for NRIs?
Liquid funds offer higher flexibility, potentially better returns, and quicker access to funds compared to fixed deposits. They allow redemption within one working day, have a low lock in of 7 days.

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Q3. How can NRIs start investing in liquid funds?
NRIs can start investing in liquid funds by setting up an NRE or NRO bank account, completing the KYC process, and then investing through various platforms such as AMC websites, registrar platforms, or stock exchange facilities.

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Q4. What are the typical returns of liquid funds for NRIs?
Liquid funds typically offer returns between 7% to 8% annually for NRIs, which is generally higher than traditional savings accounts while maintaining a low-risk profile.

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Q5. Can liquid funds be used as an emergency fund for NRIs?
Yes, liquid funds are excellent for emergency funding needs of NRIs. They offer quick access to cash without penalties, has a 7 day lock in period, and typically no exit loads after 7 days, making them ideal for unexpected financial requirements.

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