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.