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How to choose a Liquid Mutual Fund?

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Given the investment guidelines with liquid funds, there is a large homogeneity in the way liquid funds are. However, when looking for a liquid fund to invest, there are few factors such as size of the fund, credit quality and track record that matter. A big fund exudes confidence and is comforting to invest in. There are 176 liquid funds with an average size of Rs 177618 crore as on December 31, 2012.

 

Credit rating: Check the scheme's credit rating before investing and the instruments in which they invest. Higher the credit rating, lower the risk and vice-versa.


Portfolio: Check the scheme's portfolio for the kind of investments it makes such as commercial papers (CPs) and certificate of deposits (CDs).


Bond/Debenture: 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.


Collateralised Debt Obligation (CDO): Sophisticated tools that repackage individual loans into a product that can be sold on the secondary market. These packages consist 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.

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