Tipping point: Have you taken excessive risks in liquid funds?

Over the past year, liquid funds have outperformed all other categories of debt funds with a category average return of 6.65 per cent. Usually, liquid funds, which are allowed to invest in papers of up to 91 days maturity, give lower returns than funds having a higher average duration. But over the past year, interest rates have been rising, so such funds have taken a hit. 

Avoid going for the category toppers in liquid funds. It is possible to give high returns in this category only by investing in lower-rated papers. As the recent IL&FS fiasco showed, such risks can come back to haunt the fund. Stick to a fund that invests predominantly in the highest-rated securities.