Have some spare cash languishing in your savings account, but don't want to block it in a fixed deposit or risk an investment in shares?

A cash fund could be your answer.

Cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of short maturities. Their main aim is to preserve the principal and earn a modest return. So the money you invest will eventually be returned to you with a little something added.

Of course, you will not get the spectacular returns of an equity fund. But neither will you face the threat of your investment being reduced to nothing.

• An ELSS with an insurance cover

When should you invest in a cash fund?

Only when you have surplus money in your savings account.

Remember, this is not another investment avenue. This is just a place to park your money for short periods of time.

Don't need the money for a few weeks or a few months? Then consider such funds.

Since most funds do not charge either an entry or exit load, you really don't have much to lose.

• How to evaluate a fund's risk

Making the right pick

It is not easy to choose an ideal cash fund.

- Portfolio

There could hardly be any difference between the way two cash funds invest.

- Performance

The difference between the returns of the leaders and the laggards are a fraction of a percent.

- Fund manager

Selection criteria on the basis of portfolio and performance are of little use here. The only important indicator is the expense ratio since this can take away a significant chunk of the returns.

The expense ratio covers all administration and fund management expenses.