Skip to main content

Mutual Funds: All about Liquid Funds

When selecting Liquid fund, you have to decide on the investment tenure. That's because each debt fund falls into one of the above categories depending on precisely that factor. The fund manager will design his portfolio and pack it with instruments of different maturity dates, which results in it falling in a particular category. So if you have a time frame of 45 days, it will be futile to invest in a short-term debt fund.

 

If you want your money on call with virtually no downside risk, then opt for a liquid fund. These funds are targeted at investors who want to park their cash for about a week to a month. The portfolio will have securities with a maturity of maximum 91 days.

 

Go for ultra short-term funds if you wish to park your money for 1-3 months. Here the average maturity of the portfolio (over the past 18 months) would be less than a year.

 

If your investment span stretches up to a year, then short-term funds (including some gilt schemes) could match your horizon. Here the average maturity of the portfolio (over the past 18 months) would be between 1 and 4.5 years. In the case of a medium & long term fund, the average maturity would vary. In such a fund we suggest you invest as per the interest rate scenario to optimise returns.

 

One you decide on the type of fund, look at returns. The fund manager can achieve this in two ways:

Interest rate risk: When interest rates rise, bond prices fall. So if the fund manager has his portfolio stacked with lower interest rate paper, the prices of his holdings will fall resulting in a lower net asset value (NAV). On the other hand, if interest rates fall then the price of his holdings rise and so will the NAV. The longer a bond's maturity, the greater the interest rate risk. A bond fund with a longer average maturity will see its NAV react more dramatically to changes in interest rates as the prices of the underlying bonds in the portfolio increase or decline. Fund managers take calls on the interest rate direction and if it plays out well, the returns are there to see.

Credit Risk: Bonds carry the risk of default, meaning that the issuer is unable to make further interest or principal payments. They are rated by individual credit rating agencies to help describe the credit worthiness of the issuer. Higher the credit rating, lower the risk and lower the returns. Lower the credit rating, higher the risk and higher the return. So it could be that if returns are really good, he is packing his portfolio with higher risk.

 

The type of instruments that pack the portfolio is what determines the maturity of the portfolio:

Bond/Debenture: It is basically a loan with the promise to repay your principal on maturity and pay an interest. Technically, bonds are issued by corporates and secured against specific assets; debentures are unsecured. In India, the terms are used interchangeably; bonds are generally referred to debt instruments issued by financial institutions and the government, while debentures refer to corporate debt.

Certificate of Deposit (CD): Issued by banks to meet their lending needs. The tenure ranges from 1 month to 5 years.

Commercial Paper (CP): Issued by a corporation for meeting short-term liabilities. It is a lower cost alternative to borrowing from a bank. CPs can be issued for maturities between 15 days to 1 year.

Government Securities (G-Secs): Bonds issued by the government for varying maturities and are considered to be quite liquid and risk free.

Treasury Bills (T-Bill): Short-term securities to help the government raise money. Usually issued with 3, 6 and 9 month maturities.

Pass Through Certificate (PTC): Issued by banks as safeguards against risk. If the bank feels that it has too many risky assets to hold on to or when additional capital for lending is needed, through a PTC it transfers some of its long-term mortgaged assets onto other investors like NBFCs and mutual funds. The investors stand to earn more money for sharing the risk.

Collateralised Debt Obligation (CDO): Sophisticated tools that repackage individual loans into a product that can be sold on the secondary market. These packages consist of auto loans, credit card debt, or corporate debt. They are called collateralised because they have some type of collateral behind them. CDOs allow banks and corporations to sell off debt, which frees up more capital to invest or loan. A CDO enables the creation of multiple layers of PTCs with varying ratings, coupons and maturities. PTCs & CDOs are also referred to as Structured Obligations.

 

Popular posts from this blog

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- 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. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...

Mutual Fund Exit Load Changes

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 Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...
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