For this reason, the fund manager invests in high-rated debt instruments that mature in just 91 days. The allocation of funds is done as per the fund’s investment objective. The fund manager will ensure that the average maturity of the portfolio is three months. This reduces the sensitivity of the fund’s returns to interest rate movements and makes liquid funds less vulnerable.

• What returns can you expect?

  Liquid fund returns are at the lower end when compared to other debt funds as they are low on risk. However, there may be a few funds that offer higher rate of returns, but that may be simply because these funds could be taking higher credit risk.

• What investment horizon is suitable for liquid funds?

  As they primarily invest in money market securities with average maturity of 91 days, the suitable investment horizon for a liquid fund would be 3-6 months.

• Who should invest in them?

  Liquid funds are meant for those having substantial idle cash and are looking for short-term investment havens. Instead of parking your surplus funds in a savings bank account, you can invest in a liquid fund and earn higher returns. Surplus funds could be in the form of performance-based incentives, bonus and gains made by selling capital assets. Liquid funds can be used as a medium to invest in equity funds. You may initially invest the money in a liquid fund and then you can transfer the funds via Systematic Transfer Plan into an equity fund of your choice over a specified period.