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Wednesday, July 18, 2012

A low-risk investment option for uncertain times – a guest post

The stock markets have been in an unbearable state of ennui for quite some time. No clear trend is visible – leaving investors in a state of uncertainty. Without any entry load for funds, commissions have vanished from mutual fund houses. Distributors are no longer interested in pushing funds with fancy names. Most equity funds have been performing poorly.

What are low-risk investment options in uncertain times? In this month’s guest post, Nishit suggests that investors can take a look at Liquid Funds to park their savings, instead of keeping it idle in a current or savings account.

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Some time back, I had written about Gilt funds and the superb returns that they can provide in times when interest rates are falling. Gilt funds usually attract an exit load and redemption takes 3 working days.

One usually keeps a sum of money that can be readily accessed for emergencies in bank FDs or in a savings account. Savings accounts in India usually have a rate of Interest of 4% (Yes Bank with 7% and Kotak Bank with 6% for account balances above Rupees 1 lakh are exceptions rather than the norm).

Is there an option to earn more than the savings bank rate? One can look at Liquid funds. How do Liquid funds score over other debt instruments? They have 3 advantages:

  1. No Exit Loads (some have 0.25% load if exited within 45 days)
  2. Money is credited on the next business day as opposed to 3 days for Gilt funds
  3. Average rates of return have varied between between 7% and 8%

Now to prove my argument, I have selected JM Money Manager Regular Growth fund. In the past 1 year it has given a return of 10.41% and over a period of 5 years an average return of 7.63%.

Liquid funds are especially useful if one is arranging cash for a large transaction and there is a chance that the money may lie idle in a savings account for a while. Liquid funds perform better when interest rates are high. Gilt funds perform poorly in a rising interest rate regime.

Also, liquid funds have low expense ratios in the range of 0.3-0.5% as compared to other mutual funds which charge 1-2%.

Liquid funds are one more way of diversifying your portfolio. Liquid funds are especially handy during year-end and advance tax payout periods where the 91 day T-Bill shows higher rate of returns.

For those interested in debt instruments, Gilt Funds and Liquid funds are two additional savings instruments. A well diversified debt portfolio will have exposure to all these asset classes along with Non-Convertible Debentures.

Liquid funds carry the risk of default by the issuer. If the fund size is small, exit by a large investor can adversely affect the fund. Hence, while selecting a liquid fund, the following factors need to be kept in mind:

  • Size of the fund (should be at least 200 Crores in size).
  • Fund house history.
  • Fund history in terms of number of years the fund has been in existence. A 5 year track record is preferable.

Happy Investing!!

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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