Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds.

Who should invest in these?
These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and specially short-term funds shields them from any interest rate volatility.

What kind of returns do they offer?
In terms of an investment period less than 15 days, these funds are equivalent to a bank’s savings account that would give four per cent returns. They can also be compared with a bank’s fixed deposit, which will give you around nine per cent on an average. In comparison, liquid and ultra short-term funds have given eight-nine per cent returns in the past six months. The post tax returns have been better than that from a bank’s savings account.

What are the risks involved?
If you are looking at returns on a daily basis, the returns could be volatile due to the day-to-day changes in the interest rate in the money market. However, they carry low interest rate risk because of the low maturity profile. Even as a category, mutual fund investments carry more risk than investing in a bank. While bank deposits carry an assurance up to Rs 1 lakh, mutual funds carry no such assurance.Also, you cannot issue a cheque against the investment in these funds, as you can against the deposits in your savings bank account.

What are the charges for investment?
Liquid schemes do not charge any exit load from its investors. While most ultra short-term schemes have done away with these charges, a few might still charge an exit load. Other charges are similar to what one would pay for any other mutual fund scheme.

What are the tax implications?
The investor can invest in either the growth or dividend option. In case of growth, the tax treatment of these schemes is on par with that for bank fixed deposits, where the income generated is added to the investor’s income and taxed according to the tax slab. For dividend, the income is tax free at the hands of the investor, as the tax is deducted by the mutual fund itself.

Source: [Business Standard]