What is the difference between Liquid fund and Ultra-Short Term Fund?

Liquid fund is a type of mutual fund akin to a savings bank account of a bank. The liquid fund does not have lock-in period, so the investor can enter and exit at any point of time from the scheme. The fund is suitable for those who like to park short term surplus money with a potential to get more return compared to SB accounts of banks.

Liquid funds comprise mainly equity stocks, money market instruments, government bonds etc. The foreign exchange market is another channel of investment for liquid funds. The liquid funds’ investments in foreign exchange portfolio are considered as riskless in view of they are less exposed to market volatility. The liquid funds invest in securities for shortest maturity period. The maximum period of investment generally have maturity period up to 91 days.  Since the investment is for short period, the value of assets is fairly stable when they are sold in the open market.

The distinction between ‘Liquid funds’ and ‘Ultra-Short Term Funds’ is that in case of the Ultra Short Term Funds, unlike liquid funds, can invest in security for a maturity period of more than 91 days. As far as risk factor is considered investments in liquid fund portfolio are considered safe compared to Ultra Short Term funds. This is because of Ultra Short Term funds are exposed to the market for a longer period than liquid funds and they may be affected by the turbulence of market. In ‘Liquid funds’ exit load is not applicable whereas in Ultra Short Term funds exit load is normally charged. Since the investor can enter and exit at any point of time from the liquid fund scheme therefore it is better in terms of liquidity. However, return wise usually Ultra-short term funds offer more return than liquid funds.