Liquid funds: These funds invest in short-term debt instruments with maturities of less than one year. A liquid fund would normally provide good liquidity, low interest rate risk and the prevailing yield in the market. Therefore, they invest in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between three and six months. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.
As far as costs go, they have an exit load, if the investor redeems before the lock-in period. But these periods are rather low -- in most cases, around 7-10 days. The only disadvantage liquid funds has is that investors cannot take the advantage of higher returns being offered by long-term instruments. But the biggest benefit is that though the returns are lower, the risk is nominal, making it an ideal instrument for parking short-term funds.
As far as costs go, they have an exit load, if the investor redeems before the lock-in period. But these periods are rather low -- in most cases, around 7-10 days. The only disadvantage liquid funds has is that investors cannot take the advantage of higher returns being offered by long-term instruments. But the biggest benefit is that though the returns are lower, the risk is nominal, making it an ideal instrument for parking short-term funds.