With banks increasing their fixed deposit rates in the past couple of weeks, fixed maturity plans by mutual funds are also offering higher 'indicative' returns. FMPs can only indicate and not guarantee returns.
For instance, LIC Mutual Fund and Birla Sun Life Mutual Fund have offered 11 per cent returns for their 13-month FMPs that are closing on August 25.
Other fund houses such as Lotus Mutual Fund, ABN Amro Mutual Fund and Kotak Mutual Fund have indicated returns of 10.65 per cent for small investors.
Banks, on the other hand, are offering 7.5 to 10.5 per cent for fixed deposits of different tenures.
According to Hemant Rustagi, CEO, Wise Invest Advisors, a distributor of mutual funds, all the short-term (less than 91 days) FMPs that closed recently revised their rates upwards of 10.5 per cent. Many of them revised their returns during the tenure of the new fund offering as well.
Tata Mutual Fund, IDFC Mutual Fund and Franklin Templeton closed their short-duration schemes by offering an annualised yield at 10.7 per cent, 10.75 per cent and 10.6 per cent, respectively.
When the issues had opened for subscription, these funds were offering returns in the region of 10.3-10.5 per cent. A senior official at Lotus India Mutual Fund claimed that for their current schemes, they intend to keep on revising the rate of return till the last day to keep themselves abreast with the interest rate scenario.
However, before investing, it is important to remember that FMPs are a riskier form of investment as against FDs. This is because they invest in commercial papers and, in bad times, some companies, with whom the FMP funds are placed by the asset management company, could default on their commitments. This could put the principal amount at risk.
In fact, in the last few months, many fund houses have consciously stayed out of papers issued by real estate companies and non-banking financial institutions because they were perceived as riskier sectors. Some even declared this intention in their offer documents.
FMPs are debt-based funds that buy highly-rated money market instruments and commercial papers issued by companies and certificates of deposits issued by banks.
These close-ended schemes have multiple tenures such as three months, six months and over a year or more. Depending on the tenure of the FMP, fund houses invest in CPs and CDs that have a similar maturity period. The minimum amount that can be invested is Rs 5,000.
A factor that makes FMPs attractive is the tax efficiency of these products. "The additional tax benefits attract investors more than the higher yields," said Vikrant Gugnani, CEO, Reliance Asset Management.
Short-term FMPs are taxed at the rate of 14.16 per cent, if the dividend option is chosen. In the longer tenure ones, that is more than a year, the investor is charged 10 per cent without indexation and 20 per cent with indexation. Also, there are double indexation benefits for tenures of over a year. In comparison, FD returns are clubbed with investors' income and taxed accordingly.
Sunday, October 19, 2008
6 rules for rebalancing your portfolio
t's vital to revisit and monitor your portfolio at least annually to check on the status of your allocations and make sure your investment funds are performing as expected. Why?
Here's the rebalancing 'problem' in a nutshell. Let's assume you're an investor with a portfolio that includes $100,000 in stock funds (50 per cent of the portfolio) and $100,000 in bond funds (the other 50 per cent). For simplicity's sake, let's say the stocks have doubled in value to $200,000.
Note, however, that your portfolio's asset allocations are now 67 per cent in stocks and 33 per cent in bonds, a 17 per cent deviation from your original portfolio.
Depending upon your stage in life and your financial plan, this happy development may mean it is time to rebalance.
When is it time to rebalance your portfolio?
* Long-term investors should only rebalance when truly necessary, for example
* When significant gains (such as those from the bull market) or major losses have skewed your intended allocations;
* When your investment objectives change;
* When you need to shift your portfolio into more fixed income vehicles (bonds) as you enter retirement or plan to invest part of your savings for a shorter-term need;
* When stock or fund seems to be consistently and continually slipping compared with the benchmarks; or
* In the case of a mutual fund, when a proven manager leaves a fund and you are unsure about the replacement.
Research shows us that rebalancing too often accomplishes very little, except in extreme cases. In other words, take the time to choose your allocations correctly and stick with them: Rebalance annually and sell only the bottom quartile of your holdings based on performance.
Monitoring your investments is an important part of portfolio maintenance, but remember that buy-and-hold investors are long-term strategists. Life has a strange and unpredictable habit of forcing us to rebalance our lives as well as our portfolios unexpectedly. Rebalancing is as natural as replacing an automobile or anything else that wears out or just falls apart.
Always remember that the object of rebalancing your investments is to focus first on your overall portfolio, not so much on individual stocks, funds or fixed income securities.
6 portfolio rebalancing rules
Here are six crucial rebalancing rules, according to the American Association of Individual Investors Journal.
Annual rebalancing: "Remember that rebalancing does not need to be frequent - annually is sufficient. However, your actual portfolio allocations will be constantly changing due to varying performances and as you withdraw funds."
Don't stray too much: "Don't worry about straying from your desired allocation by a few percentage points, but straying by 5 per cent should start to become a concern, and straying 10 per cent will have a major impact on your portfolio's return. In between that range - it's a tough decision and will likely be dictated by your personal tax situation and personal preferences."
Minimum commitments: "At least 10 per cent of a portfolio must be committed to a market segment to have a meaningful impact" on your portfolio. "If your desired allocation to a particular asset class is only 10 perc ent, you would not want to stray below that amount by very much; in contrast, falling a few percentage points below a 30 percent desired level would be less of a concern."
Discipline: "Rebalancing provides a discipline: it forces you to sell high and buy low." In other words, when making specific rebalancing decisions, a savvy investor will take profits in the sales, while seeking value in the replacements.
Don't get greedy: If you have a portfolio of mutual funds that have been very successful, "consider selective pruning of individual holdings that have done well." In short, stay focused on your overall portfolio, without failing in love with any particularly hot funds.
Focus on the long term: "Enjoy the bull market while it lasts, but don't let several terrific years deflect you from a long-term strategy." In short, remember: The market does advance, but in cycles that go down as well as up. Plan your asset allocations for the long term through both phases.
Here's the rebalancing 'problem' in a nutshell. Let's assume you're an investor with a portfolio that includes $100,000 in stock funds (50 per cent of the portfolio) and $100,000 in bond funds (the other 50 per cent). For simplicity's sake, let's say the stocks have doubled in value to $200,000.
Note, however, that your portfolio's asset allocations are now 67 per cent in stocks and 33 per cent in bonds, a 17 per cent deviation from your original portfolio.
Depending upon your stage in life and your financial plan, this happy development may mean it is time to rebalance.
When is it time to rebalance your portfolio?
* Long-term investors should only rebalance when truly necessary, for example
* When significant gains (such as those from the bull market) or major losses have skewed your intended allocations;
* When your investment objectives change;
* When you need to shift your portfolio into more fixed income vehicles (bonds) as you enter retirement or plan to invest part of your savings for a shorter-term need;
* When stock or fund seems to be consistently and continually slipping compared with the benchmarks; or
* In the case of a mutual fund, when a proven manager leaves a fund and you are unsure about the replacement.
Research shows us that rebalancing too often accomplishes very little, except in extreme cases. In other words, take the time to choose your allocations correctly and stick with them: Rebalance annually and sell only the bottom quartile of your holdings based on performance.
Monitoring your investments is an important part of portfolio maintenance, but remember that buy-and-hold investors are long-term strategists. Life has a strange and unpredictable habit of forcing us to rebalance our lives as well as our portfolios unexpectedly. Rebalancing is as natural as replacing an automobile or anything else that wears out or just falls apart.
Always remember that the object of rebalancing your investments is to focus first on your overall portfolio, not so much on individual stocks, funds or fixed income securities.
6 portfolio rebalancing rules
Here are six crucial rebalancing rules, according to the American Association of Individual Investors Journal.
Annual rebalancing: "Remember that rebalancing does not need to be frequent - annually is sufficient. However, your actual portfolio allocations will be constantly changing due to varying performances and as you withdraw funds."
Don't stray too much: "Don't worry about straying from your desired allocation by a few percentage points, but straying by 5 per cent should start to become a concern, and straying 10 per cent will have a major impact on your portfolio's return. In between that range - it's a tough decision and will likely be dictated by your personal tax situation and personal preferences."
Minimum commitments: "At least 10 per cent of a portfolio must be committed to a market segment to have a meaningful impact" on your portfolio. "If your desired allocation to a particular asset class is only 10 perc ent, you would not want to stray below that amount by very much; in contrast, falling a few percentage points below a 30 percent desired level would be less of a concern."
Discipline: "Rebalancing provides a discipline: it forces you to sell high and buy low." In other words, when making specific rebalancing decisions, a savvy investor will take profits in the sales, while seeking value in the replacements.
Don't get greedy: If you have a portfolio of mutual funds that have been very successful, "consider selective pruning of individual holdings that have done well." In short, stay focused on your overall portfolio, without failing in love with any particularly hot funds.
Focus on the long term: "Enjoy the bull market while it lasts, but don't let several terrific years deflect you from a long-term strategy." In short, remember: The market does advance, but in cycles that go down as well as up. Plan your asset allocations for the long term through both phases.
Friday, October 17, 2008
Daily investment through mutual funds
The advantages of investing through the systematic investment plans route are well documented. To recapitulate, SIP is a method wherein you invest a predetermined fixed sum of money every month, irrespective of the state of the market.
For instance, if you want to invest a total of Rs 60,000 in an equity mutual fund scheme a year, you can either do it by putting in a lump sum or through the SIP route of Rs 5,000 every month for 12 months. This amount can be invested on a predetermined day of every month like the fifth or the tenth day.
The biggest advantage for the investor is that there is rupee cost averaging. That is, when the market goes down, more units of the scheme can be purchased because of a lower net asset value. However, most companies have SIP schemes that allow you to invest on different dates of the month.
Last year, ING Mutual fund introduced a product called Zoom investment Pack or ZIP. The unique feature of this product is that it is a daily SIP. An investor can make a bulk investment in the ING liquid fund and a transfer is made to any of the equity funds of ING Mutual on a daily basis.
The features are as follows:
* Affordability: The minimum investment required is as low as Rs 5,000. The investor can choose to invest just Rs 99 per day.
* Volatility: Captures daily market movement.
* Convenience: Since the investment is made as a systematic transfer plan (STP), only one form needs to be filled.
According to a back-testing done by the fund house, the performance of the daily ZIP is as follows:
They have undertaken a study of the performance of three time periods that include stable market, rising market and falling market conditions by investing through an STP in ING Domestic Opportunities Fund. Also, this performance has been compared with ING Domestic Opportunities fund.
The benefits are apparent in stable and falling markets�ZIP outperformed. However, in a rising market, investment through SIP will always underperform because fresh investments are made at higher NAVs.
The Indian equity markets have witnessed a turbulent period in the last quarter. While the Sensex has moved from 20,300 points in January 1, 2008 to 16,721 points on April 24, 2008, the volatility during the period has been very high. A product like ZIP can capture the daily movement in the Sensex for the investors' advantage.
By : Amita Shah
For instance, if you want to invest a total of Rs 60,000 in an equity mutual fund scheme a year, you can either do it by putting in a lump sum or through the SIP route of Rs 5,000 every month for 12 months. This amount can be invested on a predetermined day of every month like the fifth or the tenth day.
The biggest advantage for the investor is that there is rupee cost averaging. That is, when the market goes down, more units of the scheme can be purchased because of a lower net asset value. However, most companies have SIP schemes that allow you to invest on different dates of the month.
Last year, ING Mutual fund introduced a product called Zoom investment Pack or ZIP. The unique feature of this product is that it is a daily SIP. An investor can make a bulk investment in the ING liquid fund and a transfer is made to any of the equity funds of ING Mutual on a daily basis.
The features are as follows:
* Affordability: The minimum investment required is as low as Rs 5,000. The investor can choose to invest just Rs 99 per day.
* Volatility: Captures daily market movement.
* Convenience: Since the investment is made as a systematic transfer plan (STP), only one form needs to be filled.
According to a back-testing done by the fund house, the performance of the daily ZIP is as follows:
They have undertaken a study of the performance of three time periods that include stable market, rising market and falling market conditions by investing through an STP in ING Domestic Opportunities Fund. Also, this performance has been compared with ING Domestic Opportunities fund.
The benefits are apparent in stable and falling markets�ZIP outperformed. However, in a rising market, investment through SIP will always underperform because fresh investments are made at higher NAVs.
The Indian equity markets have witnessed a turbulent period in the last quarter. While the Sensex has moved from 20,300 points in January 1, 2008 to 16,721 points on April 24, 2008, the volatility during the period has been very high. A product like ZIP can capture the daily movement in the Sensex for the investors' advantage.
By : Amita Shah
Do you feel let down by your MF investments?
Few would dispute that the year 2008 has been tough on investors. This holds especially true for first-time investors i.e. the ones whose tryst with equity markets only began in the last few years. After having seen the markets surge to record highs, the downturn has certainly caught several investors off-guard.
And the despondency is not restricted only to those who have participated in equity markets via the direct equity investment route. Even investors in equity mutual funds have borne the brunt of falling markets. As a result, several investors are in panic mode. Some are even contemplating redeeming all their mutual fund investments and instead making investments in risk-free avenues like fixed deposits and bonds.
But is that the right course of action? We don't think so. To begin with, investors must conduct an honest appraisal of their risk profile and investment horizon. Also, they must candidly answer the question � why did I get invested in a given mutual fund?
If an investor truly believes that he can take on higher risk and is willing to stay invested for the long-haul (at least 3-5 years), then we believe there is no reason to panic. In fact, given the attractive valuations, investors should consider adding to their investment portfolios. As regards, the reasons for getting invested � if it was to achieve a predetermined investment objective, then it's all the more reason to stay the course.
Conversely, if the answers are on the lines of 'have a low risk appetite', 'wanted to make a quick buck' or 'to ride the rising markets for the short-term', there is a cause for concern. Such investors got invested in avenues that were wrong for them or made investments for the wrong reasons. In either case, they would do well to work out an exit strategy in consultation with their investment advisors.
As for investors who have the requisite risk-taking ability, investment horizon and clearly defined objectives backed by investment plans, it's a good time to evaluate if they are invested in the right avenues i.e. in this case, the right mutual funds. Even the best of plans will not deliver if poorly-managed funds are deployed to achieve them. However the evaluation process needs to be a proper one.
To begin with, investors would do well to understand the fund's nature and investment style, before evaluating its performance. For example, an aggressively-managed equity fund that professes to take stock and sector bets should be expected to deliver above-average results in rising markets. On the other hand, when markets move southwards, such a fund is likely to be worse hit as well. This is keeping in line with the fund's high risk � high return investment proposition. Comparing the fund's performance on the downturn with that of a conservatively-managed equity fund would be unfair, akin to comparing apples with oranges.
Similarly, understanding the fund's investment universe is vital as well. For instance, a professed mid cap fund would be predominantly invested in stocks from the mid cap segment. Expecting it to feature among the top performers at a time when large caps are rallying would be unfair.
Another common mistake is considering funds in isolation. Any advisor worth his salt will emphasise on the importance of diversification. Hence the norm is existence of investment portfolios, instead of investments in single funds in a standalone manner. The key to a well-constructed portfolio is that the downturn in an investment avenue can be offset by an upturn in another. Similarly in a mutual fund portfolio, the presence of diverse investment propositions and styles should help the investor's cause. Broadly speaking, so long as the investment portfolio is on course to accomplish the predetermined investment objectives, investors should be fine.
Clearly conducting an appropriate evaluation is easier said than done. Hence investors would do well to engage the services of their investment advisors for the evaluation exercise. The next step is to take corrective measures.
Now depending on the specifics of each case, it could vary right from altering the allocations to various funds, exiting some funds and investing in new ones to doing nothing. Surprised? Don't be. It's possible that investors are already invested in funds that are right for them and in the right allocation as well. And it is not uncommon even for the best of funds to hit a rough patch. If no material changes have occurred in a fund's investment proposition and its ability to deliver over the long-term is undiminished, keeping the faith and staying put wouldn't be a bad idea.
The importance of the evaluation exercise, especially in testing times cannot be overstated. From an investor's perspective, the key lies in striking a balance between pressing the panic buttons and being complacent. Also, engaging the services of a competent investment advisor is vital.
By Personalfn.com
And the despondency is not restricted only to those who have participated in equity markets via the direct equity investment route. Even investors in equity mutual funds have borne the brunt of falling markets. As a result, several investors are in panic mode. Some are even contemplating redeeming all their mutual fund investments and instead making investments in risk-free avenues like fixed deposits and bonds.
But is that the right course of action? We don't think so. To begin with, investors must conduct an honest appraisal of their risk profile and investment horizon. Also, they must candidly answer the question � why did I get invested in a given mutual fund?
If an investor truly believes that he can take on higher risk and is willing to stay invested for the long-haul (at least 3-5 years), then we believe there is no reason to panic. In fact, given the attractive valuations, investors should consider adding to their investment portfolios. As regards, the reasons for getting invested � if it was to achieve a predetermined investment objective, then it's all the more reason to stay the course.
Conversely, if the answers are on the lines of 'have a low risk appetite', 'wanted to make a quick buck' or 'to ride the rising markets for the short-term', there is a cause for concern. Such investors got invested in avenues that were wrong for them or made investments for the wrong reasons. In either case, they would do well to work out an exit strategy in consultation with their investment advisors.
As for investors who have the requisite risk-taking ability, investment horizon and clearly defined objectives backed by investment plans, it's a good time to evaluate if they are invested in the right avenues i.e. in this case, the right mutual funds. Even the best of plans will not deliver if poorly-managed funds are deployed to achieve them. However the evaluation process needs to be a proper one.
To begin with, investors would do well to understand the fund's nature and investment style, before evaluating its performance. For example, an aggressively-managed equity fund that professes to take stock and sector bets should be expected to deliver above-average results in rising markets. On the other hand, when markets move southwards, such a fund is likely to be worse hit as well. This is keeping in line with the fund's high risk � high return investment proposition. Comparing the fund's performance on the downturn with that of a conservatively-managed equity fund would be unfair, akin to comparing apples with oranges.
Similarly, understanding the fund's investment universe is vital as well. For instance, a professed mid cap fund would be predominantly invested in stocks from the mid cap segment. Expecting it to feature among the top performers at a time when large caps are rallying would be unfair.
Another common mistake is considering funds in isolation. Any advisor worth his salt will emphasise on the importance of diversification. Hence the norm is existence of investment portfolios, instead of investments in single funds in a standalone manner. The key to a well-constructed portfolio is that the downturn in an investment avenue can be offset by an upturn in another. Similarly in a mutual fund portfolio, the presence of diverse investment propositions and styles should help the investor's cause. Broadly speaking, so long as the investment portfolio is on course to accomplish the predetermined investment objectives, investors should be fine.
Clearly conducting an appropriate evaluation is easier said than done. Hence investors would do well to engage the services of their investment advisors for the evaluation exercise. The next step is to take corrective measures.
Now depending on the specifics of each case, it could vary right from altering the allocations to various funds, exiting some funds and investing in new ones to doing nothing. Surprised? Don't be. It's possible that investors are already invested in funds that are right for them and in the right allocation as well. And it is not uncommon even for the best of funds to hit a rough patch. If no material changes have occurred in a fund's investment proposition and its ability to deliver over the long-term is undiminished, keeping the faith and staying put wouldn't be a bad idea.
The importance of the evaluation exercise, especially in testing times cannot be overstated. From an investor's perspective, the key lies in striking a balance between pressing the panic buttons and being complacent. Also, engaging the services of a competent investment advisor is vital.
By Personalfn.com
Money lessons for women
"It's a Man's world" is an often repeated cliche. However, things have changed to a great extent and urban women are enjoying more economic prosperity now. In the last couple of decades, there has been a tremendous improvement in the ratio of women entering the workforce.
Richa Joshi (name changed) in her thirties is a corporate executive. While she is quite comfortable with managing the day-to-day expenses of the family, she has never bothered to manage her own money. No wonder, she has no idea about the insurance, investment and taxation details of her family's money.
Earlier, the onus was on her father, and now her husband's chartered accountant does the needful. As a result, she is completely clueless about her investments and joint investments. More importantly, she has no idea about the family's liabilities.
This is a common story. Not just women, but many men suffer from the same malaise when it comes to managing their own money. They depend on others, like family members and other professionals.
While managing daily money is no mean task, it is important that Joshi takes control, or at least inculcates a strong understanding of her overall financial situation. Of course, there are movies, where it is heartening to see women taking active interest in the Sensex stories rather than the Saas Bahu stories. But most of this interest gets only accentuated when the Sensex is on an upswing.
Typically, most women tend to focus on their family's immediate or short-term needs such as day-to- day expenses, lifestyle purchases and, at best, vacations. What they lose out is their long-term financial goals, be they retirement, financial security or financial independence. Though it may sound cliched, it is necessary for a woman to attain these three objectives. Whether married or not, working or not, every woman must plan for the long term.
The following are key questions every woman must ask herself:
* What if something were to happen to my spouse today? Will the family be able to live as well as we are doing today?
* What are my savings and investments? Are my investments relevant to my financial situation? Are my liquidity, income and growth needs taken care of?
* In uncertain times, how long can the family survive? Do we have enough contingency funds?
* What would I do in case of an unfortunate incident like a divorce or a separation? Will I be able to maintain the same lifestyle?
* Am I up to date with the skills that are required in the job market? As many have found out, after marriage and children, when they come back to the market, they are completely outdated in terms of the skill set required.
As it happens, in case of an emergency, many discover that most of their investments are in tax-savings instruments, earning returns of just 4 per cent a year. Even if there are investments, they were made in a haphazard manner and do not yield great returns. The situation is often worse when there is a loan hanging over their head.
It is imperative, therefore, that women maintain their own balance sheets. This would make them aware of the funds in their name. They should be aware of any joint investments and have access to the necessary documents. Also, if there are liabilities, there should be proper corpuses or insurance plans to deal with such situations. And most importantly, there should be proper medical insurance that will take care of their or their family's health needs.
Yes, while it's true that women are looking at everyday needs of the family, it's imperative as well that they keep a tab on their financial security to ensure a safe future.
By : Amar Pandit
Richa Joshi (name changed) in her thirties is a corporate executive. While she is quite comfortable with managing the day-to-day expenses of the family, she has never bothered to manage her own money. No wonder, she has no idea about the insurance, investment and taxation details of her family's money.
Earlier, the onus was on her father, and now her husband's chartered accountant does the needful. As a result, she is completely clueless about her investments and joint investments. More importantly, she has no idea about the family's liabilities.
This is a common story. Not just women, but many men suffer from the same malaise when it comes to managing their own money. They depend on others, like family members and other professionals.
While managing daily money is no mean task, it is important that Joshi takes control, or at least inculcates a strong understanding of her overall financial situation. Of course, there are movies, where it is heartening to see women taking active interest in the Sensex stories rather than the Saas Bahu stories. But most of this interest gets only accentuated when the Sensex is on an upswing.
Typically, most women tend to focus on their family's immediate or short-term needs such as day-to- day expenses, lifestyle purchases and, at best, vacations. What they lose out is their long-term financial goals, be they retirement, financial security or financial independence. Though it may sound cliched, it is necessary for a woman to attain these three objectives. Whether married or not, working or not, every woman must plan for the long term.
The following are key questions every woman must ask herself:
* What if something were to happen to my spouse today? Will the family be able to live as well as we are doing today?
* What are my savings and investments? Are my investments relevant to my financial situation? Are my liquidity, income and growth needs taken care of?
* In uncertain times, how long can the family survive? Do we have enough contingency funds?
* What would I do in case of an unfortunate incident like a divorce or a separation? Will I be able to maintain the same lifestyle?
* Am I up to date with the skills that are required in the job market? As many have found out, after marriage and children, when they come back to the market, they are completely outdated in terms of the skill set required.
As it happens, in case of an emergency, many discover that most of their investments are in tax-savings instruments, earning returns of just 4 per cent a year. Even if there are investments, they were made in a haphazard manner and do not yield great returns. The situation is often worse when there is a loan hanging over their head.
It is imperative, therefore, that women maintain their own balance sheets. This would make them aware of the funds in their name. They should be aware of any joint investments and have access to the necessary documents. Also, if there are liabilities, there should be proper corpuses or insurance plans to deal with such situations. And most importantly, there should be proper medical insurance that will take care of their or their family's health needs.
Yes, while it's true that women are looking at everyday needs of the family, it's imperative as well that they keep a tab on their financial security to ensure a safe future.
By : Amar Pandit
Why liquid funds can be good for you
There are two categories of funds that have caught the imagination of investors these days -- liquid and liquid-plus funds. Though, at present, most of the money in these funds comes from institutional investors, the retail investor is slowly beginning to realise their benefits. These funds can prove to be useful for the retail investor to manage their short-term surpluses.
In the last one year, liquid funds have returned between 7.7 per cent and 8.85 per cent. Liquid-plus funds, on the other hand, have slightly higher returns between 8.4 and 11.29 per cent. Obviously, that makes them a better choice as against money earning a dismal 3-3.5 per cent in your savings account. Let us look at these two options in detail.
Liquid funds: These funds invest in short-term debt instruments with maturities of less than one year. A liquid fund would normally provide good liquidity, low interest rate risk and the prevailing yield in the market. Therefore, they invest in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between three and six months. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.
As far as costs go, they have an exit load, if the investor redeems before the lock-in period. But these periods are rather low -- in most cases, around 7-10 days. The only disadvantage liquid funds has is that investors cannot take the advantage of higher returns being offered by long-term instruments. But the biggest benefit is that though the returns are lower, the risk is nominal, making it an ideal instrument for parking short-term funds.
Liquid-plus funds: These funds were launched to cater to those with a stomach for slightly higher risk, and as a result higher returns. A typical liquid-plus fund will have similar investments like a liquid fund, but around 30 per cent of the corpus is invested in instruments with longer maturity period.
They do not have any restriction on the mark-to-market component (liquid funds can have only up to 10 per cent) and there is no lock-in period for the liquid-plus funds category. Also, liquid-plus funds are a hit as they are more tax-efficient. The dividend distribution tax works out to 14.16 per cent as against 28.33 per cent for liquid funds.
As it can been seen, the positioning of these two categories is quite different. That is, they provide an option between short-term liquid funds and other long-term debt funds. They are, hence, attractive for those who want a slightly higher return without going all the way with only higher tenure investment options.
Though the performance of these two funds is similar, in a rising interest rate regime, long-term maturity papers are observed to be riskier and their value reduces. This leads to loss of returns of liquid-plus funds.
In the recent times, tough market conditions and the fear in investors have hit the assets under management of both these funds. Especially, corporate investors have been cautious. This has led to a negative impact of the expense ratio on the returns.
As the tax treatment of liquid-plus funds is better, they would still outperform, considering the net-of-tax parameter. This is why retail investors can consider this as a more sensible option, albeit at higher risk, to invest their money in the short term.
By : Suresh Sadagopan in Mumbai
In the last one year, liquid funds have returned between 7.7 per cent and 8.85 per cent. Liquid-plus funds, on the other hand, have slightly higher returns between 8.4 and 11.29 per cent. Obviously, that makes them a better choice as against money earning a dismal 3-3.5 per cent in your savings account. Let us look at these two options in detail.
Liquid funds: These funds invest in short-term debt instruments with maturities of less than one year. A liquid fund would normally provide good liquidity, low interest rate risk and the prevailing yield in the market. Therefore, they invest in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between three and six months. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.
As far as costs go, they have an exit load, if the investor redeems before the lock-in period. But these periods are rather low -- in most cases, around 7-10 days. The only disadvantage liquid funds has is that investors cannot take the advantage of higher returns being offered by long-term instruments. But the biggest benefit is that though the returns are lower, the risk is nominal, making it an ideal instrument for parking short-term funds.
Liquid-plus funds: These funds were launched to cater to those with a stomach for slightly higher risk, and as a result higher returns. A typical liquid-plus fund will have similar investments like a liquid fund, but around 30 per cent of the corpus is invested in instruments with longer maturity period.
They do not have any restriction on the mark-to-market component (liquid funds can have only up to 10 per cent) and there is no lock-in period for the liquid-plus funds category. Also, liquid-plus funds are a hit as they are more tax-efficient. The dividend distribution tax works out to 14.16 per cent as against 28.33 per cent for liquid funds.
As it can been seen, the positioning of these two categories is quite different. That is, they provide an option between short-term liquid funds and other long-term debt funds. They are, hence, attractive for those who want a slightly higher return without going all the way with only higher tenure investment options.
Though the performance of these two funds is similar, in a rising interest rate regime, long-term maturity papers are observed to be riskier and their value reduces. This leads to loss of returns of liquid-plus funds.
In the recent times, tough market conditions and the fear in investors have hit the assets under management of both these funds. Especially, corporate investors have been cautious. This has led to a negative impact of the expense ratio on the returns.
As the tax treatment of liquid-plus funds is better, they would still outperform, considering the net-of-tax parameter. This is why retail investors can consider this as a more sensible option, albeit at higher risk, to invest their money in the short term.
By : Suresh Sadagopan in Mumbai
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