Liquid funds invest in money market instruments with maturity upto 91 days. Each time an instrument matures the fund manager gets to redeploy it at rate prevailing at that time. In a rising interest rate regime, in which Reserve Bank of India, is busy raising repo rate, the short term rates including those on money market instruments go up. It allows the fund manager of liquid funds to deploy money at higher rate of interest, which in turn brings higher returns.

Liquid funds are preferred means for parking money for the short term. As per AMFI data, liquid funds manage assets worth Rs 411,291.99 crore as on 31 August 2022.