Liquid Mutual Funds or money market funds are debt mutual fund schemes which invest in cash assets such as treasury bills, certificates of deposit for short investment horizon. Excess cash which may be required again urgently in a few days, weeks or months can be easily invested in Liquid Mutual Fund schemes.
These instruments have a maximum maturity period of 91 days and are considered safe because they mitigate interest rate volatility risk.
Liquid funds, like every other mutual fund scheme, invests in securities that have a market price.
When market price of these securities moves up or down, so does your mutual fund's NAVs. The NAV of a Liquid Fund doesn't fluctuate as much as other fund types.
Another usage for Liquid funds is when investors want to stagger investments in Equity Mutual Funds over a period. Money is invested in a liquid fund and systematically transferred to an equity fund every month. The fact that Liquid funds do not carry an exit load means they can be redeemed or transferred very easily.
Liquid funds are also unique as compared to other funds in the debt category with regards to the NAV. The NAV of liquid funds is calculated for 365 days as compared to other debt funds where the NAV is calculated only for business days. The liquidity factor is most attractive for investors in such funds as the redemptions are credited to the bank account on the next working day.
Liquid funds can therefore generate a stable income while providing high liquidity to one’s portfolio.