Liquid funds can be termed as debt mutual funds which invest money in mostly short-term market instruments which have very less risk, for example government securities, treasury bills, call money, etc,. The investment in such instruments can be made for a period of up to 91 days while the maturity can be lower than it also.
Now the question that arises is how to choose a liquid fund, considering the fact that they are safest instruments, not much is left to scrutinize however there are still some points to consider:
The past track record – The track record of the fund will give us an idea about the performance of the fund in the past and how much returns it has paid off, chances of it performing in the future are better if it has performed well in the past.
Portfolio – The investor should definitely take a look at the instruments in which the investment is being made as whether it is commercial papers, certificate of deposits or treasury bills. This will help the investor in understanding the return a fund can give in a short period.
Credit Rating – The funds are given ratings by the rating agencies based on their performance and it can help an investor choose a suitable fund to invest.
Diversification – The portfolio has to be diverse in order to reduce the risk and it can also provide the investor with high returns if the money is invested in different instruments.
Do consider these points while choosing a liquid fund.