Guest Column Liquid Funds: A simpleton that we conveniently ignore at our cost!

Liquid Funds: A simpleton that we conveniently ignore at our cost!

Rajesh Krishnamoorthy, MD, iFAST Financial India, shares an interesting perspective on how your investors can make the most of liquid funds.
iFAST Financial India Mar 28, 2012

Rajesh Krishnamoorthy, MD, iFAST Financial India, shares an interesting perspective on how your investors can make the most of liquid funds.

Introduction to Liquid Funds

I get about 9% on my savings money! Yes, please read again – I get about 9% on my savings money! And we all know that our basic savings bank account provides only 4%, barring a few banks which give a return of 6% on your savings account. So, the natural question – How have I doubled my return on basic savings?

I have been a strong advocate of getting your money to beat inflation. When all things become costlier and money doesn’t keep pace with this increase in cost, you are only doing disservice to your client’s future.

We have all been advising our clients to keep at least a few months of their salary in savings account. This is essential to fight any unexpected requirements that may come up in their lives. However, what if they had an equally convenient option to park their savings money in another well-regulated, transparent, easy to understand, low risk product? A mutual fund!

Dear reader, I am talking of the simpleton – Mr. Liquid Fund! He has another name too, Mr. Cash Fund! A Liquid or a Cash fund is built on three tenets – high liquidity, low risk, stable returns. But wait, isn’t this what you get in savings account too? Of course, I have to emphasize here that you are guaranteed 4% by your bank, whereas, any mutual fund in our country cannot guarantee returns on their products. But the question I ask myself and my family members is – how important is guaranteed returns when you know that the risk you take is very low?

I bring you to another fundamental rule in investing your client’s money – if the incremental risk one takes isn’t as much and the reward one can expect from that investment decision is way more than what your client gets at present, one should take the plunge! Any investment carries risk, but the bigger question you need to ask is “How much risk?” Post May 1, 2009, SEBI regulations have ensured that liquid funds do not invest in underlying instruments that have more than 91 days to mature. This provides a strong foundation for minimal interest rate risk.

Earlier in the month, the RBI has decided to maintain its hard stance on Repo Rate by not cutting the rate in its report dated March 15, 2012. Therefore, banks still have to borrow more from the RBI at higher rates of interest.

Although, experts believe that the RBI will ease out the rates in the next policy meeting which is scheduled during the middle of the next month but the matter is not as easy as it looks. Inflation, which remains a major concern, has again started heading northwards after a slight fall in the last few months. Inflation figures for the month of February came at 6.95% from 6.55% recorded in January 2012.

For the next three to six months, our economy is expected to witness great hunger for overnight and short-term money (this is what the investment world calls – tight liquidity). In conditions of tight liquidity, there is more demand for cash but less supply of the same

When the banks do such overnight borrowing, the investment world calls it Repo. Whenever you get to read that the Repo volumes are high, it means that there is shortage of overnight money in the financial markets. This presents us with an opportunity to make our client’s savings money sweat it out a little more – and that can be achieved by investing into liquid funds. There are over 50 different liquid funds for you to choose from. Buying them today is a breeze with many online platforms. These funds have no entry or exit loads and your client is free to take out his money any day. For those who are savvier, ultra short term debt funds could be their logical next step.

If you or your client want to promote a noble cause, donate the extra income you generate from liquid funds to a good charity. Are you ready?

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