Cash management funds are funds that invest
in debt and money market instruments with maturity not exceeding 91 days. They
invest in instruments such as Treasury bill, corporate bond/debenture, commercial
paper, etc. The fund is suitable for investment in short term horizon. The fund
is suitable for people looking to park their surplus cash temporarily and
provides an alternative to savings bank account.
Since the maturity period is low the
fluctuation in interest rate in short term is also lower and hence it carries
low risk. The instruments are held till maturity and are not traded often. The
aim of such funds is to provide liquidity to the investors. They invest in high
quality debt instruments to optimize the returns. Thus, there is low market and
low credit risk. As the instruments are held till maturity, the expense ratio
of the fund is generally lower.
You can exit the scheme anytime and there
is no entry or exit load. The withdrawals are processed within 24 hours. The
funds are not completely risk free as default in debt instruments having
exposure in the fund can negatively impact the returns of the fund.
The fund is also suitable for those who have
lump sum amount in hand and they want to invest in equity funds in systematic
manner. They can invest their surplus in cash management funds and then
transfer the amount in equity funds through systematic transfer plan (STP). The
amount can be invested in growth or dividend plan. Cash management funds can
generate returns in the range of 7-8%, while it is 4% in case of saving bank
deposit.
