Skip to main content

Mutual Funds: Liquid and Ultra Short-Term Bond Funds



Investors use the category of mutual fund schemes called liquid funds (also known as money market funds) for short-term parking, as these funds are most stable in returns. There is another category of funds known as ultra short-term bond funds (earlier known as liquid plus), which are managed in a manner similar to liquid funds. It is necessary that investors are aware of both types of funds and their respective advantages that will aide in making informed decisions.


Liquid funds are those that are defined as money market funds in the offer document and invest in money market instruments of residual maturity up to 91 days. What sets liquid funds apart in terms of lowest volatility in returns among all categories of funds is that there is no mark-to market (MTM) of the portfolio on a daily basis unless there is a trade in the secondary market in the underlying security (or securities). Practically there is no trade in money-market instruments and valuation of daily NAV happens on an accrual basis i.e., by adding the coupon accrued for the day without any mark-to-market impact.

 

Ultra short-term bond funds (USTBs) are defined as debt funds in the offer document and the fund manager is free to take securities of maturity longer than 91 days, but there is no compulsion to do the same. Valuation of daily NAV happens as per the valuation matrix provided by the rating agencies, hence there could be a mark-to-market impact. However, the component of securities with residual maturity more than 91 days (for which the valuation matrix is published) is maintained on the lower side, so that the volatility in returns is limited.


Returns in USTBs are marginally higher than liquids by virtue of the marginally higher portfolio maturity. Normally, the longer the maturity of the instrument, the higher is the yield on that instrument (time value of money). USTBs have the liberty to purchase securities with maturity of more than 91 days and on an average, the portfolio maturity is longer than liquids funds. This leads to a higher accrual rate on the portfolio of USTBs. The volatility of returns in USTBs is marginally higher than liquids funds due to the small MTM component.

OPERATIONAL ASPECTS:

In liquid funds, purchase is T-1 i.e., cleared funds are given to the AMC by the cut-off time of 2 pm and availing of previous day's NAV. Redemption is T+1 i.e., the redemption request is placed within the cut-off time of 3 pm and the proceeds are received the next day.


In USTBs, purchase is on a T+0 basis i.e. that day's NAV would be applicable. If the amount is more than . 1 crore, clear funds have to be given to the AMC by the cut-off time of 3 pm, otherwise the NAV of the day on which clear funds are being given will be applicable. Redemption is T+1 for USTBs as well. For both fund categories the application should be submitted and time stamped at the AMCs'/RTA's office within the cut-off time.

TAXATION DIFFERENCES:

While dividends are tax-free in the hands of the investor, there is a dividend distribution tax (DDT) that is deducted by the AMC on behalf of the investor and passed on to the government.

 

The rate of DDT in case of liquid funds is 25% (plus surcharge/cess). From June 1, 2011, the DDT rate for corporate investors will go up to 30%.

 

In case of USTBs, there are two rates of DDT: for individual investors, it is 12.5% (plus surcharge/cess) and for corporate investors the rate is 20% (plus surcharge/cess). From June 1, the DDT rate for corporate investors will go up to 30%.


The advantages of liquid funds are that they provide stable returns and T-1 purchase. Another advantage is the declaration of NAVs on Sundays/holidays as well, which means redemption request put in on Friday (within the cut-off time) for proceeds on Monday would be at Sunday's NAV.


In USTBs, this redemption will take place at Friday's NAV (since there is no NAV on holidays), which means no accrual income for two days. The advantages of USTB funds are marginally higher returns than liquid funds and tax efficiency over liquid funds i.e., lower DDT rate for individuals. For a horizon of more than two weeks, investors can avail of the relatively higher returns and tax efficiency of USTBs and for a short horizon of a few days, liquid funds are safer. Both the fund categories can be used for systematic investments into equity funds.

 

Popular posts from this blog

Save Tax With Mutual Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...

Mirae Asset Ultra Short Term Bond Fund and Mirae Asset Tax Saver Fund

Mirae Asset Mutual Fund   has renamed   Mirae Asset Ultra Short Term Bond Fund , an open ended debt scheme, to   Mirae Asset Tax Saver Fund   with effect from October 18, 2016. Also, Mr. Sumit Agrawal, the co-fund manager of Mirae Asset India Opportunities Fund (MAIOF) and Mirae Asset Great Consumer Fund (MAGCF) ceases to be the fund manager with effect from October 1, 2016. Consequently, MAIOF shall now be solely managed by Mr . Neelesh Surana while MAGCF shall continue to be co-managed by Mr. Neelesh Surana and Ms. Bharti Sawant. ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. ID...

Good Loan

Why Is It A Good Loan?: Loans against gold are cheaper and better than personal loans as the former are available at lower interest rates. In contrast, the interest rates on personal loans are not standardised and can vary from bank to bank. Also, a personal loan depends on a host of factors including, the borrower's salary, profession and the purpose for which the loan is being taken.      For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But loans against gold are available for as low as 11%. Secured borrowing such as a loan against gold, investments or property is cheaper because it is backed by some assets, which command a good value at any point of time. If the borrower defaults on the loan, the banks can liquidate the assets to settle the loan account.    Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loa...

How to Stop your MF SIP

  How to Stop your Mutual Fund SIP A systematic investment plan (SIP) is designed to continue till the end date mentioned in the application form. A few mutual funds now offer the option to `pause' the systematic investment for a limited period. This allows the investor to keep the investment habit, while providing temporary liquidity. The SIP restarts automatically after the pause period. Pause period SIPs can be paused only for a specific period of time. The shortest and longest periods for which a SIP is allowed to be paused is specified by the AMC . Form A SIP Pause form must be filled out by the investor. This form can be obtained from the AMC or the Investor Service Centre . It can also be downloaded from the mutual fund website. Details The start date and end date of the pause must be clearly mentioned in the form. The form also asks for details of the existing SIP, as well as the investor's name and folio number. All unit holders are required to sign the SIP Pause ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now