What should one consider while selecting a liquid fund? Read my article in Mid-day Gujarati edition on 22nd February here ...
http://www.gujaratimidday.com/business/expert-opinion/expert-views-on-mutual-funds-15
The English translation is as under:
Sometime ago,
we saw what to look for if one wants to compare two or more different equity
funds. Today, we will discuss how to choose a liquid fund (or ultra-short term
bond fund – most retail investors may be fine with the latter and in this
article, we will use a common term “liquid fund” for both these categories). In
order to decide on the selection criteria, it is important to first identify
the objectives for parking money in a liquid fund.
Primarily,
there are three reasons why people use liquid funds, (1) as a contingency fund,
(2) to park money which would be used for some expenses in the short term, or
(3) to temporarily park money meant for investment in equity funds later (at an
opportune time or through systematic transfer).
To begin with,
let us understand one thing common in all the above objectives: one is looking
at (1) safety of capital and (2) easy and convenient liquidity. If the returns
are high, it is an additional benefit, but not the primary purpose for
investing in liquid funds.
Let us first
look at the third of the three objectives listed above, “to temporarily park
money meant for investment in equity funds later (at an opportune time or
through systematic transfer).” In this case, the objective is to earn higher
returns through equity investment. The liquid fund is used only for the purpose
of temporary parking. The question here is not about selecting a liquid fund,
but of selecting an equity fund. Once you have done that, you need to invest in
the liquid fund of the same fund house to enable smooth transfer whenever
required. You need not spend too much time on selection of the liquid fund in
such a case.
That leaves
the first two objectives of putting money in liquid funds. In both cases, the
critical point is to get the money as and when needed, without loss in value.
Hence, the critical factors to evaluate the schemes should be (1) safety, (2)
convenient liquidity, (3) ease of transaction, (4) timely and hassle-free
credit of the money in your account when needed.
Let us start
with evaluating safety in a liquid fund. We have highlighted earlier that
mutual funds are structurally superior to most products on this count. However,
even within that, different liquid funds may have different risk levels.
First of all,
liquid funds invest predominantly in debt and money market securities issued by
companies and banks. These corporate papers carry a risk that the companies may
default on their commitments. In such a case, it is wise to check the credit
rating profile of the funds. The second thing you need to look at is the
average maturity of the portfolio. The lower the average maturity, the safer
the fund. You must check this in case of ultra-short term bond funds, but need
not worry about the same if you are investing in a liquid fund. In case of
liquid funds, SEBI regulations do not allow the fund to invest in any paper
having maturity beyond 90 days.
Points no. 2,
3 and 4 would be almost the same for all the funds, except you may want to be
doubly sure that the fund does not have any exit load even for a very short
period. Since you are investing for an unknown period, exit load may be
avoided. You need to check the exit load only at the time of your investment,
as the same is applicable for all prospective investments and not on
retrospective basis.
Many fund
houses these days offer SMS based or App based transactions. These allow extra
convenience as you can seamlessly transfer money from your bank account (if
registered for the same purpose) to the fund and vice versa.
One more
thing, expenses matter in case of liquid funds. Check the expense ratio before
investing.
Liquid funds
are the easiest products among the mutual funds to understand and benefit from.
So go ahead,
and make use of these funds when you have surplus money to be parked for short
periods.
-
Amit
Trivedi
The author
runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from
Financial Market Cycles We Repeatedly Forget”. The views expressed are his
personal opinions.
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