A fund for your spare cash

Have some spare cash languishing in your savings account, but don't want to block it in a fixed deposit or risk an investment in shares?

A cash fund could be your answer.

Cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of short maturities. Their main aim is to preserve the principal and earn a modest return. So the money you invest will eventually be returned to you with a little something added.

Of course, you will not get the spectacular returns of an equity fund. But neither will you face the threat of your investment being reduced to nothing.

• An ELSS with an insurance cover

When should you invest in a cash fund?

Only when you have surplus money in your savings account.

Remember, this is not another investment avenue. This is just a place to park your money for short periods of time.

Don't need the money for a few weeks or a few months? Then consider such funds.

Since most funds do not charge either an entry or exit load, you really don't have much to lose.

• How to evaluate a fund's risk

Making the right pick

It is not easy to choose an ideal cash fund.

- Portfolio

There could hardly be any difference between the way two cash funds invest.

- Performance

The difference between the returns of the leaders and the laggards are a fraction of a percent.

- Fund manager

The pedigree of the fund manager is also not too significant here.

Selection criteria on the basis of portfolio and performance are of little use here. The only important indicator is the expense ratio since this can take away a significant chunk of the returns.

The expense ratio covers all administration and fund management expenses.

The average expense ratio of funds in the category is 0.62%. You can use this figure as a benchmark when looking at a fund's expense ratio.

• How to compare mutual funds based on performance

A fund you could consider: Reliance Liquid Treasury

Snapshot

Launch: March 1998
Minimum investment: Rs 25,000
NAV: 16.36 (as on July 21, 2005)

Expense Ratio

In a category where expenses mean a lot, Reliance Liquid Treasury is being run with remarkable economy. This is the most economical member of the category.

The fund charges just 0.18% for expenses, while its average peer cost is 0.62%. This makes the fund the most economical member of the category.

However, the expense ratio has not been so low in the past. The fund deserves praise for bringing it down from a high of 1% in March 2002 to this level.

Returns

The fund is an average performer.

The average return of funds in this category is 0.42% (one month return), 1.26% (three month return) and 4.8% (one year return).

As against that, the returns from Reliance Liquid Treasury (Growth) are:
1 month: 0.41%
3 months: 1.27%
1 year: 4.77%

One of the largest funds in the category, Reliance Liquid Treasury looks very attractive for its low expense ratio and a quality portfolio. A great place to deposit your spare cash. 

 

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Illustration: Dominic Xavier