Liquid funds

Liquid funds are a debt category that holds very short-term instruments — money lent for a matter of days or weeks. Because the money is returned so soon, there is little time for prices to move much, which makes these among the least volatile funds available. “Least volatile” is the right phrase; “no risk” is not.

What they hold

Liquid funds hold short-dated instruments such as treasury bills and short-term paper issued by companies and banks, generally maturing within about three months. The short maturities mean interest-rate risk is small — there is little duration for a rate change to act on — and the fund is turning its holdings over constantly as they mature.

Overnight funds: one step shorter

Shorter still than a liquid fund is an overnight fund, which lends only until the next morning — the lowest-volatility debt category there is. It has its own page: overnight funds.

What they are used for

These funds are commonly used to hold money for a short spell — days to a few months — where the priority is getting the money back intact and soon rather than growing it. Some people use them as a staging point, for instance when moving a lump sum gradually into another scheme. This describes what the category is for; it is not a recommendation that you use one.

Low risk is not no risk

Even here, the value is not fixed and not promised. Very short-term paper can still be affected by a credit event, and the funds are priced daily like any other, so a fall is possible even if an unusual one. Many also apply a small graded exit charge in the first few days. The honest description is “low volatility, quick access” — not “a place your money cannot fall”.

A pricing quirk to know

Liquid funds have their own cut-off rules: an earlier purchase cut-off, and the ability to allot the previous day’s NAV when the money is in early. It rarely changes much, but it is a genuine difference from other funds worth knowing if you park a large sum for a few days.

How they sit next to a bank account

People often weigh these against leaving money in a savings account. The trade is different in kind: a bank balance is a bank deposit, while a liquid fund is a market-priced fund whose value, though usually stable, is not promised. Neither is “better” in the abstract — they are different things, and the comparison with bank products is drawn out in SIP or a fixed deposit.