RETAIL investors in India are slowly accepting the idea of parking their surplus money in liquid mutual funds. These funds serve as a viable option to the savings bank (SB) accounts due to superior returns along with safety and liquidity features.
Liquid funds primarily invest in money market instruments like certificates of deposits (CDs), commercial papers (CPs) or government-backed treasury bills with a residual maturity of up to 91 days. Most liquid funds are extremely cost-effective as they do not have an exit load and carry a very low annual charge, which generally ranges from around 0.30 to 0.70 per cent. Liquid funds are open-ended and can be redeemed on a daily basis.
Investors can also carry out a Systematic Transfer Plan (STP) from a liquid fund to an equity fund's systematic investment plan (SIP). Thus the investor would benefit by gaining better returns as compared to an SB account and at the same time make systematic equity investments.
Launched in January 1999, SBI Magnum Insta Cash Fund is an open-ended liquid fund with average assets under management of Rs 3,829 crore for the quarter ended March 2011. The fund has been ranked Crisil Fund Rank 1 (top 10 percentile) for the last three quarters in the liquid funds (retail) category. The fund has consistently featured in the top 30 percentile in the category for the last five quarters.
Investors should note that returns should not be the sole criteria to choose a liquid fund, as returns offered by most liquid funds are in a narrow range. Based on a one-year horizon, the differential between the highest and the lowest returning liquid fund is less than just 2 per cent. Hence, in addition to performance, even portfolio-based attributes should be analysed. These primarily include credit quality (safety), liquidity and concentration, which are crucial to liquid funds evaluation. Crisil Mutual Fund ranking has a weightage of close to 50 per cent allocated to portfolio-based attributes.
PERFORMANCE The fund has outperformed both its peers and the benchmark (Crisil Liquid Fund Index) across timeframes. It has also delivered returns greater than the risk-free rate most of the times over the last one year. Further, the volatility of SBI Magnum Insta Cash Fund is in line with the category peers. It must be noted that liquid funds by their very nature tend to have lower volatility.
PORTFOLIO ANALYSIS Over the last one year, SBI Magnum Insta Cash has invested almost 86 per cent of its portfolio in P1+ and equivalent instruments while the rest of the investments are in cash equivalents and fixed deposits. Thus, the fund has maintained investments of the highest credit quality in its portfolio.
Liquidity is also an important parameter that needs to be assessed for liquid funds. A portfolio saddled with illiquid securities would hamper the ability of the fund manager to liquidate the portfolio during times of heavy redemptions. According to the latest portfolio (March 2011), the fund scores high on liquidity.
Concentration in terms of companies is a risk to scheme portfolios. In case of concentrated portfolios, schemes may be adversely affected in the event of a downturn in a company. SBI Insta Cash Fund maintains a well diversified portfolio at an issuer level.
Liquid funds, thus, provide a good alternative to retail investors to park their short-term surplus cash vis-a-vis an SB account. While liquid funds are clearly ahead of savings bank accounts in terms of returns (both pre and post tax), they are also considerably safe and liquid as well. However, it is imperative for retail investors to look at a combination of returns, risk and portfolio attributes while choosing liquid funds and use them to their advantage.
