Liquid fund

A liquid fund invests in debt instruments maturing within 91 days. Because the holdings mature so quickly, the value barely moves when interest rates change, which is why people use these funds for an emergency cushion or for money waiting to be invested.

Why the short maturity matters

Debt prices fall when interest rates rise, and the longer a bond’s maturity, the harder it swings. A liquid fund deliberately holds only very short-term debt, under about 91 days, so there is almost no room for rates to move against it. That is what gives it its steadiness: the NAV usually inches up a little each day rather than jumping around, the opposite of an equity fund.

What it is good for

Two jobs suit a liquid fund well. One is a slice of your emergency fund or any money you might need within weeks or months, where you want it safe but earning a little more than a savings account. The other is parking a lump sum before feeding it into equity through an STP. Redemption usually reaches your bank the next working day, and some schemes offer instant credit up to a capped amount.

Low risk is not no risk

A liquid fund is low-risk, not risk-free. A credit problem with one of its holdings can still dent the NAV, as has happened occasionally, and the return is not guaranteed. It also has a small graded exit load in the first few days. Treat it as a safe parking spot, not a growth investment. See liquid funds and same-day money.