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

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
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