The fund managers prefer to invest in securities with high credit rating. This ensures that there is the least possibility of default by issuers offering safety to investors’ capital. Given the shortterm nature of investments, the portfolio as a whole does not carry much of interest rate risk.
Due to which, your chances of entering into a debt of a personal loan or home loan etc are reduced to nil, in order to finance your financial requirements. These short term instruments invest in certificate of deposits, commercial paper and bonds with less than one year to maturity.
The fund works fine as a short-term investment opportunity for those who do not intend to take any risk with their capital but want to earn better tax-adjusted returns than a short-term fixed deposit. They also do offer offer dividend payout option dividend pay outs at regular interval such as monthly and fortnightly. Dividends paid by these schemes attract a dividend distribution tax at the rate of 13.52% for individual investors.
If you are a very short term investors, it is better to invest in liquid plus fund that do not have exit load than to invest in a short term bond fund with an exit load of 0.5% if you were to exit before six months from the date of allotment of units.