Here are five ways to position an ultra short term fund in your portfolio. Not only do you earn a return, but your capital is at very low risk.
In a recent news item, Mint reported that Reliance Industries Ltd withdrew money from bank deposits and expanded investment in mutual funds by as much as 13x, when comparing fiscal end March 31, 2013 to a year ago. Most of the money was invested in debt-oriented schemes, which have been offering better returns than fixed deposits in banks.
Investors would do well to learn from this.
Though bank fixed deposits are a favourite with investors in India, ultra short-term funds are a smart alternative to fixed deposits for investment periods over a month.
These are debt funds that invest predominantly in money market instruments such as Certificates of Deposit (CD), Commercial Paper (CP) and Treasury Bills (T-Bills), and in some cases even short-term corporate bonds. The actual allocation would vary between the players. For instance,UTI Treasury Advantage has 13% of its portfolio in corporate debt while Axis Treasury Advantage has less than 1% in the same.
The portfolios of such funds are characterized by low average maturities with a focus on safety and liquidity.
Liquid funds have a mandate that does not allow them to invest in instruments whose maturity exceeds 91 days. In the case of ultra short term funds, the average maturities vary. For instance, Canara Robeco Treasury Advantage has an average maturity of 98.6 days, as against UTI Treasury Advantage whose average maturity is 142 days. But they will not exceed a year making them less susceptible to interest rate risk.
Here are 5 ways to position ultra short term funds in your portfolio
- Your investment horizon is between 1-6 months
Liquid funds invest in money market instruments whose maturity does not exceed 91 days. These funds are attractive avenues for parking cash for extremely short periods and are an alternative to a savings account. On the other hand, ultra short-term funds are an alternative to fixed deposits and investors can park their cash here if they are not keen on a very short time frame (liquid funds) or a slightly longer one (short-term funds).
Ultra short-term funds are the best place to invest in if your investment horizon is anything between 1 to 6 months, though you could choose to keep them longer.
- Short-term debt is lacking in your asset allocation
A good financial advisor would allocate a portion of your investments to short-term debt. This part of the asset allocation matrix is important to cater to short-term liquidity needs. You can keep this as a contingency or emergency fund. Liquidity is of no problem here since the redemption proceeds of an ultra short term fund are directly credited to your bank account within one business day.
- You need a temporary parking place post profit booking
When your investments mature or you have booked a profit, don’t be in a hurry to reinvest the money. Hold it till you find the right investment avenue. This is where ultra short term funds can play a role. Let’s say you decided to book your appreciation in ICICI Prudential Bluechip Equity. You can do so by switching the redemption amount to ICICI Prudential Flexible Income Plan till the time you see an opportunity to reenter equity funds. Your money will continue to earn a return and you also have liquidity while you wait to find the next long-term investment opportunity.
- You want to take advantage of the interest rate movement with moderate risk
In a falling interest rate scenario, some fund managers take an exposure to corporate bonds with a residual maturity of 1 -3 years. This enables investors to benefit from interest rate movements without taking on too much of duration risk. Templeton India Ultra-short Bond Fund is a case in point where the fund manager manages his portfolio more actively taking a 35% exposure to corporate bonds.
- You have no idea where to invest
Better to be cautious than put your money in the wrong place. If you have not yet got down to financial planning and designing an asset allocation, put your money in an ultra short term fund. Once you decide which funds are good for you, you can gradually switch tranches of it to other relevant investment avenues.
Summing it up
- If you are looking at parking your cash for periods above 1 month but less than a year, try ultra short term funds.
- Just as a liquid fund competes with a bank savings account, an ultra short term fund is an alternative to a bank fixed deposit.
- Choose a fund whose portfolio is predominantly tilted towards CDs and CPs. Corporate bonds can provide a booster in the returns but overexposure could reduce the liquidity and increase volatility.
- Large funds tend to be less volatile in terms of returns as they are more insulated against huge inflows and redemptions.
- Not only do you earn a return, but you won’t lose capital as long as your money is lying in an ultra short term fund.
The article was first published on May 14, 2013 on www.fundsupermart.co.in
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
