Liquid funds belong to the category of ultra short term debt funds. These can be used as alternative for short term bank deposits (deposits for less than a year).
1. They invest in debt instruments which have maturity of 1-2 months.
2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.
3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.
4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.
5. They accept a minimum investment of 10,000.
6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.