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Good Lqiuid Mutual Funds or MMMFs in India-VRK100-25112009

Good Lqiuid Mutual Funds or MMMFs in India-VRK100-25112009

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This SPECIAL article (second revision dated Nov. 25, 2009, including tables on salient features and returns on liquid funds) is written for the benefit of my SCRIBD readers by RAMA KRISHNA VADLAMUDI, BKC, BOMBAY, INDIA. Investors looking for investments in liquid mutual funds can consider the following liquid funds. Every individual needs to keep some money in liquid funds or savings banks (SB) deposits for meeting their emergency or day-to-day requirements. Experts opine rather suggest that at least six months of one’s income must be kept in liquid form for emergency/medical purposes. One can keep two months of one’s income in SB account, the remaining four months of such emergency/contingency fund can be kept in liquid funds. While SB accounts offer immense liquidity through ATM cards, mobile banking and cheque book facility; there are some good alternative to SB deposits. Even institutional investors also keep their short-term surpluses in such instruments separately floated for them by mutual funds.

There are a variety of liquid mutual funds, variously termed as, money market mutual funds or liquid mutual funds. While SB accounts are supposed to give an interest of 3.25 per cent per annum, the effective yield for a depositor works out to a meager 2.5 per cent or even less due to some peculiar features of SB accounts in India. Banks pay interest on SB accounts on the minimum balance maintained between 10th and last day of the month. Depositors lose out heavily because of this distortion. This gross aberration is being rectified by Reserve Bank of India effective April 1, 2010 – from that date banks have to pay interest on daily average balance. Though belated, this is a good and depositor-friendly intervention from the central bank.
This SPECIAL article (second revision dated Nov. 25, 2009, including tables on salient features and returns on liquid funds) is written for the benefit of my SCRIBD readers by RAMA KRISHNA VADLAMUDI, BKC, BOMBAY, INDIA. Investors looking for investments in liquid mutual funds can consider the following liquid funds. Every individual needs to keep some money in liquid funds or savings banks (SB) deposits for meeting their emergency or day-to-day requirements. Experts opine rather suggest that at least six months of one’s income must be kept in liquid form for emergency/medical purposes. One can keep two months of one’s income in SB account, the remaining four months of such emergency/contingency fund can be kept in liquid funds. While SB accounts offer immense liquidity through ATM cards, mobile banking and cheque book facility; there are some good alternative to SB deposits. Even institutional investors also keep their short-term surpluses in such instruments separately floated for them by mutual funds.

There are a variety of liquid mutual funds, variously termed as, money market mutual funds or liquid mutual funds. While SB accounts are supposed to give an interest of 3.25 per cent per annum, the effective yield for a depositor works out to a meager 2.5 per cent or even less due to some peculiar features of SB accounts in India. Banks pay interest on SB accounts on the minimum balance maintained between 10th and last day of the month. Depositors lose out heavily because of this distortion. This gross aberration is being rectified by Reserve Bank of India effective April 1, 2010 – from that date banks have to pay interest on daily average balance. Though belated, this is a good and depositor-friendly intervention from the central bank.

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Published by: RamaKrishna Vadlamudi on Nov 25, 2009
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 Rama Krishna Vadlamudi, BOMBAY. www.scribd.com/vrk100. Nov. 25
 th
 , 2009
Page 1 of 6
Rama Krishna Vadlamudi November 25th, 2009 
Investors looking for investments in liquid mutual funds can consider thefollowing liquid funds. Every individual needs to keep some money in liquid fundsor savings banks (SB) deposits for meeting their emergency or day-to-dayrequirements. Experts opine rather suggest that at least six months of one’sincome must be kept in liquid form for emergency/medical purposes. One cankeep two months of one’s income in SB account, the remaining four months ofsuch emergency/contingency fund can be kept in liquid funds. While SB accountsoffer immense liquidity through ATM cards, mobile banking and cheque bookfacility; there are some good alternative to SB deposits. Even institutionalinvestors also keep their short-term surpluses in such instruments separatelyfloated for them by mutual funds.There are a variety of liquid mutual funds, variously termed as, money marketmutual funds or liquid mutual funds. While SB accounts are supposed to give aninterest of 3.25 per cent per annum, the effective yield for a depositor works outto a meager 2.5 per cent or even less due to some peculiar features of SBaccounts in India. Banks pay interest on SB accounts on the minimum balancemaintained between 10
th
and last day of the month. Depositors lose out heavilybecause of this distortion. This gross aberration is being rectified by ReserveBank of India effective April 1, 2010 – from that date banks have to pay intereston daily average balance. Though belated, this is a good and depositor-friendlyintervention from the central bank.Liquid mutual funds invest in short-term instruments with maturity of up to 91days. As such, their returns will depend on the demand for short-term funds. Forexample, during 2008, due to tight liquidity conditions, liquid funds were able todeliver returns of nine to 10 per cent per annum to liquid fund investors. This wasvery much higher than the supposed SB deposit rate of 3.25 per cent. But thisyear, SEBI had directed liquid funds not to invest in instruments of more than 91-day maturity effective from May 1, 2009. As such, their returns have come downdrastically for liquid funds in the last six months.
Moreover, due to benign interest rate regime in the monetary system, short-term rates ofcertificate of deposits and commercial papers have come down. If and when the interestrate cycle takes an upward curve, then these liquid funds will be able to generate returnsof five to seven per cent in future. As of now, due to immense liquidity and subduedinterest rates, the returns from liquid funds are hovering between four and five per cent,which is just half of what they paid in 2008. The returns may improve going forwarddepending on interest rate cycle.
 
 Rama Krishna Vadlamudi, BOMBAY. www.scribd.com/vrk100. Nov. 25
 th
 , 2009
Page 2 of 6
Salient features of liquid mutual funds:
Liquid funds invest in debt instruments and money market instruments
Investments in liquid funds are practically risk-free, even though they carryinterest rate risk and credit risk
Interest rate risk and credit risk are practically NIL as these funds invest inshort-term instruments
Investments of up to Rs one lakh in SB accounts are guaranteed by DICGC(an arm of RBI) in the event of any bank going bankrupt; however, there isno such protection for investments in liquid funds
There are no entry and exit loads for liquid funds
They are easy to invest and easy to redeem, though in certain cases theredemption may take two to three working days
One important factor to consider before investing is expenses ratio. Thelower the expenses ratio, the better for investors
SUITABILITY OF LIQUID FUNDS:
Liquid funds are suitable for individual or institutional investors who are seekingreturns for short-term tenure and wants to keep the funds in highly liquid form, thatis, encashable easily
Instead of keeping more than required money in savings bank deposits (which givea yield of about 2.50 per cent per annum) or current accounts (which give nointerest), individual/institutional investors can consider liquid funds alternatively
GOOD LIQUID FUNDS: (Table 1)
YEAR 2009 2008LIQUID FUNDSAAUM Rscrore* Q3 Q2 Q1 Q4 Q3 Q2 Q1Returns % #
CANARA ROBECO LIQUID RETAIL-G24 1.03 1.2 1.63 2.46 2.36 2.08 2.13HDFC CASH MANAGEMENT SAVINGSPLAN-G5,233 1.18 1.32 1.78 2.24 2.33 2.09 2.04LIC MF LIQUID-G 13,315 1.24 1.38 1.92 2.5 2.37 2.14 2.13UTI MONEY MARKET MUTUAL FUND-G207 1.15 1.37 1.82 2.4 2.33 1.92 1.83
* AAUM-Average assets under management as on Oct. 31, 2009 
 
# The returns in percentage are absolute, but not annualized for calendar quarter - for growth plans of open-ended schemes This colour indicates highest return 
From the above table, it can be observed that, LIC MF’s Liquid fund-Growth Plan hasbeen consistently giving highest returns in the last seven quarters. In fact, the data forlast 30 quarters (since Apr-Jun 2002 qtr till the latest) indicate that LIC MF’s Liquid fundhas given one of the best returns in 22 quarters. Next come HDFC Cash ManagementSavings Plan and UTI Money Market Mutual Fund. (see tables 2 and 3 below)
 
 Rama Krishna Vadlamudi, BOMBAY. www.scribd.com/vrk100. Nov. 25
 th
 , 2009
Page 3 of 6
Main features of these liquid funds: (Table 2)
LIQUID FUNDS
MinimumSubscriptionRsMin.BalanceRsExpensesRatio %in 2009STP Port-folio RISKLIC MF LIQUID-G 25,000 25,000 0.4 YESGoodRatingLOWCANARA ROBECO LIQUID RETAIL-G 5,000 NA 0.42 NOGoodRatingBelowAverageHDFC CASH MANAGEMENTSAVINGS PLAN-G 10,000 NA 1.27 YESGoodRating LOWUTI MONEY MARKET MUTUALFUND-G 10,00010,000 0.43 YES
 
GoodRatingBelowAverage
STP-Systematic Transfer Plan; Data as on 20.11.09; & Data source: ValueResearch 
RETURNS FROM LIQUID FUNDS: (Table 3)
LIQUID FUNDS
1-weekreturn %#1-monthreturn %#3-monthreturn %#6-monthreturn %#1-yearreturn %#
LIC MF LIQUID-G
0.09 0.40 1.20 2.52 6.42
CANARA ROBECO LIQUID RETAIL-G
0.07 0.30 0.93 2.06 5.42
HDFC CASH MANAGEMENT SAVINGSPLAN-G
0.08 0.37 1.12 2.38 5.98
UTI MONEY MARKET MUTUAL FUND-G
0.07 0.33 1.00 2.29 5.99
# The returns in percentage are absolute, but not annualise
Data as on Nov. 20, 2009; Data source: ValueResearch 
SOME OTHER GOOD LIQUID FUNDS:
There are several well-known liquid mutual fund schemes, like, Templeton IndiaMoney Market Account (TIMMA is the first MMMF in India), Birla Sun Life CashManager, SBI Magnum InstaCash, Quantum Liquid fund (net assets are verylow) and DWS Insta Cash Plus Regular.
In the category of institutional plans of liquid schemes, the following schemes arewell known: Birla Sun Life Cash Manager Inst, ICICI Prudential Liquid Super Inst,Reliance Liquidity fund, Tata Liquid Super HI, Templeton India Super Inst, andUTI Liquid Cash Inst.

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