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

Impact of Demonetization

Impact of Demonetization:   ·          Improvement in Government's fiscal position going forward:   Ø   Higher benefits for the Government if lesser currency notes comes back into the system Ø   Increase in Tax Reporting leading to better revenue hence better fiscal   ·          System Liquidity to increase going forward ·          Inflation expected to fall further ·          Growth to be positively impacted over medium to long term with near term hiccups   Duration Funds:   In light of the above facts and expectations investors may consider long duration funds ( Reliance Dynamic Bond Fund, Reliance Income Fund & Reliance Gilt Securities Fund ) as these funds would benefit on further easing of yields over next 12 to 18 months.   'Reliance Dynamic Bond Fund' aims at generating returns even in stable interest rate markets by exploring different trading strategies. The strategy to differentiate Tactical Positions f...

Tata Fixed Income Portfolio Fund dividend

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)       Tata Mutual Fund has announced dividend under the dividend option of Tata Fixed Income Portfolio Scheme B2 Plan A-DQ, Tata Fixed Income Portfolio Scheme B2 Reg-DQ and Tata Fixed Income Portfolio Scheme B2 Direct-DQ. The record date has been fixed as August 29, 2013. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Onlin...

Nomination in Investment

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   Nomination in investment   As an investor, you spend most of your precious time in deciding on your investments, their tenure, and the returns that your invested money will fetch practically. Do you know who gets your investment money when you are "no more"? I am sure most of you must have come across the 'nominations' column, while filling any of your financial application form, be it that for a Mutual Fund, or a Demat Account, or simply a Bank Account. More often, people have a tendency to leave the nomination field blank, or fill the same uncertainly, without even understanding the big importance of this little detail. Here, let us try to put forth the significance of a nomination into our financial lives. What is nomination? A person to wh...

How to gauge the risk profile of your mutual fund portfolio?

MUTUAL funds are considered to be an investment option for those who do not generally devote a lot of time to monitoring and managing their portfolios. Investors experience both good as well as tough times as far as mutual fund investments are concerned. But while evaluating the portfolio of their equity mutual fund holdings there are a few points that one should check to know about the level of risk that they are facing. Often there are situations where there is a higher risk than what was estimated initially. Here are a few ways to evaluate various risk levels. Individual holding exposure : The portfolio of the equity fund where one has invested or plans to invest needs to be scrutinised to see whether the risk levels are such that could lead to a larger volatility in the holdings. Depending upon this factor and the risk taking ability of the investor the choice about a particular fund as an investment should be made. One key point to watch out is whether there is a large ex...

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...
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