In the wake of demonetisation, many investors have excess funds
idling in their savings accounts. For money which they want available on call, they should consider putting it in liquid funds, where it can earn a higher return than the four per cent in a savings account.
The liquid fund space has been witnessing some action in recent times. The Securities and Exchange Board of India (Sebi) is considering allowing fund houses to offer instant redemption to retail investors in liquid funds. If this happens, the attractiveness of liquid funds
would rise, since the returns
could be better while liquidity would be on a par with a savings account.
At present, it takes 24 hours to withdraw money from most liquid funds
if the request is made on a working day. Fund houses like Reliance and DSP BlackRock already offer the instant redemption facility, while Birla Sun Life
Asset Management Company (AMC) will begin offering it soon.
Recently, Birla Sun Life AMC
launched a mobile app called Active Account that makes managing a liquid fund very easy. Money can be transferred from your bank account into Birla Sun Life
Cash Plus by swiping right in the app and it can be transferred back into your account within 24 hours by swiping left.
Reliance Mutual Fund offers a Visa-powered card, Reliance Any Time Money, which acts like a debit card but is linked to the fund house’s liquid fund. With this card, investors can withdraw money from ATMs and also pay for goods at merchant establishments. The daily limit is the lower of 50 per cent of the balance in the scheme or Rs 50,000 per day.
Next, let us turn to how to go about selecting the right liquid fund. According to A. Balasubramanian, chief executive officer, Birla Sun Life
AMC, “Selection of these funds
should be done largely based on size, the fund's longevity, and the fund house's focus on building fixed income as an asset class.”
First, look at assets under management (AUM). “It should not be less than Rs 1,000 crore. If the corpus is small, a few institutional players pulling out a couple of hundred crores will cause volatility in the fund,” says Vidya Bala, head of research, Fundsindia.com.
Expense ratios in this category vary from six basis points to two per cent, the median being 21 basis points. Prefer a fund with an expense ratio lower than the median.
Examine the fund's portfolio. “Some fund managers try to increase returns
by investing in lower-grade papers. Returns
could take a hit in case of a default or downgrade,” says Murthy Nagarajan, head-fixed income, Quantum AMC. He adds that investors should also see if the fund is leveraged, in which case the “other assets” category would be negative. Bala of Fundsindia.com suggests choosing a fund that has a larger proportion of its assets in Treasury bills and less in commercial papers.
Finally, the past year's average return of 7.6 per cent in liquid funds
may not be repeated in the coming year due to declining interest rates. To estimate what your return over the next one year is likely to be, take the monthly return and annualise it. If the monthly return is 0.57 per cent, multiply it by 12, which gives 6.84 per cent. This is a reasonable estimate of what you are likely to earn.