Liquid Funds

We keep our funds in savings account for safety and convenience to withdraw it any time. 

While a savings account is a good option to keep your money handy, is it really the ideal way to save your money?

Liquid funds offer a potentially rewarding parking facility for short-term, idle cash.

What are Liquid Funds?

Liquid Funds are mutual fund schemes that invest in debt and money market securities with less than 91 days to maturity. Money is invested in Repo, Call Money, Treasury Bills, Commercial Paper, Certificate of Deposit and Non-Convertible Debentures. Liquid Funds maintain a portfolio average maturity of up to 60 days, hence their primary source of income is interest. The income from Liquid Funds is generally determined by short-term interest rates.

Liquid Funds are positionedat the lowest end of the risk-return scale and operate on the principle of Safety, Liquidity and Returns in that order of priority.

Benefits of Liquid Funds

• High Liquidity: Liquid Fundsare open ended mutual fund schemes and have no entry or exit load. Hence an investor can withdraw money any time. An investor can avail of the direct credit facility to his bank A/c.The redeemedamount normallygets credited within one working day if the redemption request is submitted before cut-off time.
• Low Risk: Liquid funds offer highest degree of safety asthe investment is done in short term debt securities of high credit quality.Investment is done in securities with residual maturity of less than 91 days. This greatly reducesinterest rate risk and hence volatility in returns generated by these funds.
• ReasonableReturns: Primary source of income for liquid funds is interest accrual. During tight liquidity conditions, liquid funds benefit from high interest accrual.

Taxation (Rates applicable for Individual/HUF for FY2013-14)

• Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.
• Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.
• Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower plus surchare plus 3% cess.

Outlook

Short term rates are expected to remain lower as deposit growth for banks continue to remain low and credit pickup remains weak in Apr-Sept season.

1-month CP and CD rates closed at 8.00% and 7.65% respectively as on 02-July'13. Call money rate ended at 7.00-7.15% . Since most of the return for liquid funds come from coupon income, liquid funds will continue to offer reasonable return on surplus cash.

Who should invest?

Liquid Fund are suited for investors who have a very short investment horizon (few days to 3Months)and want quick liquidity and better than average returns from their surplus money.

ShortTerm Funds

Sometimes we may not need instant access to our money.At the same time we may not want tolock in funds in a fixed deposit as we might require it in the near future.

Short Term Funds are designed to optimize returns for such short duration (6 monthsto 1 year).

What are Short Term Funds?

Short term funds are the debt mutual fund schemes that seek to generate regular income by investing in short term debt securities and money market instruments. The portfolio is comprised of instruments like Certificates of Deposits (CDs), Commercial Paper (CP), corporate debt, treasury bills, central or state government securities. The average maturities of short term funds range between 1 to 3 years.

Short term funds are positioned between ultra short term funds and income funds in terms of risk-return matrix.

Features of Short Term Funds

• Risk-Return trade off: A short term fund delivers Total Return. This is a combination of the return from interest earned (called interestaccrual), and that from change in the market value of securities (called mark-to-market or MTM). Short term funds have moderateMTM and interest rate risk.

          Total Return = Interest Accrual + Capital Gain (Loss)

          Scenario 1: Drop in interest rate.Short term funds benefitfrom the high accrual when short term rates             are high due to liquidity crunch in the market. Asthe interest rates begin to drop, they benefit from                 capital gain on the portfolio.

          Scenario 2: Rise in interest rate.Increase in short term rates can result in MTM losses on the portfolio.           However, a relatively lower duration of short term funds reduces volatility in returns. Low duration                also helps in taking advantage of rising rates by re-investing at higher yields.

• Liquidity: Being an open ended scheme, units in shortterm funds can be sold at any time without regard to bond maturities subject to exit load as applicable for the scheme.
• Taxation: As per tax rates applicable for Individual/HUF for FY2013-14, applicable from Jun 1, 2013.Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower, Plus 10% surcharge plus 3% cess.

Outlook

Interest rates at the short end currently are at 10.51% and 11.45% for 1 year CD and CP respectively . The elevated short term rates providetwo advantages:

a. Locking in current yields will ensure a reasonably good accrual

b. The fall in the short term yields would be steep, than that of the long term yields when the yield curve turns flattish from inverted. This will ensure capital gainson the portfolio. However, the flattening of the Yield Curve would be gradual .

Who should invest?

Short Term Funds are ideal for investors having conservative / Moderate risk profile and investment horizon of 6 months to a year.

Ultra Short Term Funds

Sometimes we may not need instant access to our money. At the same time we may not want to lock our money into a long term investment because we might require it in the near future.
Ultra Short Term Fundis designed for such short-term requirement, as it enables deploying of funds for shorter periods of time, from 3 to 6 months, to generate regular income while cautiously monitoring the rate of interest.

What are Ultra Short Term Funds?

Ultra Short Term Funds are mutual fund schemes that invest in debt and money market instruments of short maturities. Unlike liquid funds, Ultra Short Term Funds can invest in securities of maturity longer than 91 days, but there is no compulsion to do the same. Money is invested in Treasury Bills, Commercial Paper, Certificate of Deposit and Non-Convertible Debentures.
Ultra Short Term Funds are positioned between liquid funds and short term funds with respect to risk-return matrix and can maintain a higher average maturity. This offers USTs theflexibility to enhance yields in various short term yield curve scenarios (e.g. inverted, steep, linear etc)

Features of Ultra Short Term Funds

• Returns: Normally, the longer the maturity of the instrument, the higher is the yield on that instrument (time value of money). Ultra Short Term Funds can invest in securities with maturity of more than 91 days.This leads to a higher accrual income on the portfolio vis-a-vis liquid funds.
• Risk: Ultra Short TermFunds invest in instruments that have a longer maturitythan liquid funds, they are exposed to some interest rate risk. However, the component of securities with residual maturity more than 91 days is maintained on the lower side, so that the volatility in returns is limited. Low duration ofthese funds can help an investor take advantage of rising rates by re-investing at higher yields.
• Liquidity: Being an open ended scheme, units in Ultra Short TermFunds can be sold at any time without regard to bond maturities.
• Taxation: As per tax rates applicable for Individual/HUF for FY2013-14, applicable from Jun 1, 2013.Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower, Plus 10% surcharge plus 3% cess.

Outlook

Interest rates at the short end currently are at 11.41% and 12.13% for 3months CD and CP respectively. The 91 Days and 364 Days treasury bills closed at 10.78% and 10.05% on 23-Aug'13. Investing at these elevated yields will ensure highaccrual income on the short term savings.

Who should invest?

Ultra Short term funds are suited for investors who have a short investment horizon (3 months to 6months), wants to optimize returns on surplus cash and seek high level of liquidity for their investments.

Fixed Maturity Plan

FixedMaturity Plan

Attractive Interest Yield
Provide Stability to the portfolio


A Fixed Maturity Plan (FMP) is a closed-ended debt scheme, wherein the maturity of underlying debt instruments is aligned with the tenure of the scheme. So a one-year FMP will invest in debt instruments that mature in one year or just before this period. FMPs generally invests in money market instruments, certificate of deposits (CDs), commercial papers (CPs) and corporate bonds.
The fund is open for subscription only during New Fund Offer (NFO) period at the time of launch of the scheme.


What is Fixed Maturity Plan?

Fixed Maturity Plans are ideal for investors of all risk profiles (conservative / Moderate /Aggressive) having investment horizon that matches with the tenure of the FMP.
Features of Fixed Maturity Plan

• Risk-Return: Returns from FMPs are relatively stable, though not guaranteed. They invest in instruments with a maturity profile matching that of the fund, and the instruments are typically held till maturity.Hence any change in interest rates in the interim period does not affect the value of the fund.
• Wide Maturities: FMPs are available with numerious maturityoptions like 1 month, 3 months, 6 months, 1 year, 3 years, 5 years etc. An investor can invest in the relevant plan depending upon his investment horizon and the requirement of cash flows on maturity.
• Lower cost:FMPs involve minimum expenditure on fund management, as there is no requirement for a time-to-time review by fund managers. Since these instruments are held till maturity, there is also a cost saving in respect of buying and selling of debt instruments.
• Liquidity: FMPs are closed endedin nature and the maturity proceeds are available at the end of the tenure. FMPs are also listed on the stock exchanges for secondary market trade, but mostly they are illiquid. Henceinvestors should choose FMPs that match their investment horizon.
• Dividend Distribution Tax (DDT): Dividends are tax free in the hands of investors. However, fund houses need to pay dividend distribution tax of 28.325% (25%+10% surcharge+3% Cess) at source.
• Short Term Capital Gain (STCG): Investment for a period of upto12 months qualify for short-term capital gains. STCG is taxed at marginal rate of taxation.
• Long Term CapitalGain (LTCG): Investment for a period of more than 12 months qualify for long-term capital gains. LTCGis 10% without indexation or 20% with indexation whichever is lower, Plus 10% surcharge plus 3% cess.
• Taxation: As per tax rates applicable for Individual/HUF for FY2013-14, applicable from Jun 1, 2013

Who should invest?

Mutual Fund investments are subject to market risk. Please read the scheme information document and statement of additional information carefully before investing.

Outlook

The yields are elevated across the term structure. FMPs provide an opportunity for investors to lock-in at these yields and provide stability to his portfolio in the current volatile markets.
An investor will have to choose the FMPs with tenure that match his investment horizon.

What Should investors in Income Funds do?

Investors in income funds today are looking for direction


Investors today have a common question when it comes to income funds. “What should I do with my investment
in income funds? I have invested in duration funds and income funds this year when the 10 year G-Sec yield
was around 8.00% p.a. Interest rates have gone up substantially post liquidity tightening measures taken
by the RBI in July 2013. Market volatility has increased since then and given the recent hike in the repo
rate, there is some confusion about what I should do with my investment.” Should such investors hold on, or
switch into short term funds? Let us look at the current investment landscape and endeavour to arrive at an
investment perspective.

The current investment landscape

• We are going to enter a busy season in the second half of the financial year (H2) where the demand for
liquidity will rise due to the festival season and higher consumer spending that is likely to occur after the
harvest season. Therefore, systemic liquidity will remain tight and the RBI will have to inject liquidity in
order to ease systemic liquidity.
• The H2 borrowing program is likely to encounter weaker investor interest due to volatility seen in previous
months.
• Corporate bond issuance is dwindling due to unfavorable yield levels and lack of investor interest. This is
driving borrowers to the banking system for loans, which is visible through higher credit off-take (around
17% YoY despite weak economic growth).
Expectations for the near-term
• We believe that the RBI is going to focus more on controlling inflation and hence may hike the Repo Rate to around 8% by December 2013 (until the core Consumer Price index (CPI) is contained at around 6-7% YoY).
• We expect banks to lend more to the corporate sector and likely reduce their govt. bond purchases.
• We also expect banks to keep issuing more 1Y bank CD in order to bridge their asset-liability gap until
deposit growth picks up meaningfully.
• Based on these factors, we believe that bond yields are likely to remain range-bound with the 10Y govt bond yield trading between 8.5% to 9% in the near-term.
• 12M CD yields will likely trade between 9% to 10% p.a. and credit spreads could widen gradually in order to reflect the underlying credit supply-demand dynamic.


What should investors do?

• We believe that it will be prudent to gradually shift from high duration funds to low duration funds (around
1Y or less) and prefer quality and liquidity over higher yield.
• It is important to note that investors are not compromising on yields for investing in low duration funds
given the flat term-structure of interest rates that is prevailing as of now.
• We believe this strategy will be ideal for superior risk-adjusted returns over the next one year.