Another reason for opting liquid mutual funds in this high interest rate scenario is the handsome annual returns of about 9.5 percent. Although Reserve Bank of India has announced de-regulation of interest rate for savings bank accounts, most banks still offer just 4 per cent interest and as such, liquid funds could be just the right financial instrument to go for.

Along with high annual returns and quick redemption, the liquid mutual funds are attractive for the tax benefit it provides to the investor. For the dividend plans, an individual can enjoy dividend distribution tax on liquid funds of about 28.325 percent. With all the benefits comes another advantage - the low interest rate risks. Since these instruments have a maturity period of less than 91 days, the interest rate risks are not similar to other debt funds. However, these instruments are not completely risk free and investors may experience fluctuation in valuations.

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