Liquid funds are schemes that invest in financial instruments such as bank deposits, treasury bills, commercial paper, and other securities that mature in 90 days. The Net Asset Value (NAV) is calculated annually unlike other debt mutual funds where NAV is calculated for business days only. These funds have no lock-in period and funds can be withdrawn within 24 hours. The liquid funds have the lowest risk associated across all debt funds. The sole reason is that these funds invest in fixed income securities with short maturity. Besides this, the liquid funds do not have entry and exit load.
Who should invest in liquid funds?
Any investor looking to park their surplus funds can consider investing in these funds. The returns generated by these funds are up to 7%-8% per annum. You should invest all your emergency corpus in the liquid funds as the maturity will be done next day and the requisite funds will be released into your savings bank account. Ideally, these funds are used to diversify your portfolio among debt funds or meet short-term financial goals. Some mutual funds also offer redemption and realization of funds within the same day itself. As these funds can generate better returns as compared to saving bank, which offers 3.5%-65%, depending upon the bank. The nature of the portfolio is that these funds cannot afford to make much risk, and you should invest in AAA rated liquid funds only.
5 things to consider before investing in liquid funds: http://www.shoprwise.com/top-liquid-funds-to-invest/