Cash funds have always provided an alternative to the savings account. Fidelity MultiManager Cash Fund is one with a difference.
This one is the first liquid Fund of Funds of the country.
What is a liquid fund?
Liquid funds are known as ultra short-term bond funds or cash 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.
Examples of such investments include Treasury Bills, Commercial Paper, and Certificates of Deposit.
Treasury Bills, commonly referred to as T-bills, are short-term government securities with maturities of no more than one year. They are considered risk-free because they are issued by the government.
CP is a debt instrument issued by companies to meet short-term financing needs.
A CD is an interest-bearing, short-term debt instrument issued by a bank.
Considering that money market instruments are some of the most secure instruments, these funds are good investments for conservative investors for their short-term investment needs.
They also are a great alternative to the traditional bank savings account. If you have some cash that you can spare for a few days or a few months, you could try this.
What is a Fund of Fund?
A FoF means that it will invest in other mutual funds. So this fund will invest in cash funds of other Asset Management Companies (mutual fund houses).
While evaluating a liquid fund for investment, the fund would look at its performance record for at least 12 months and compare it to the average performance in that category.
Further, the respective AMC must have a yearly average of total assets under all its liquid schemes of at least Rs 500 crore or more.
The fund would not invest more than 25% of its assets in any one single fund.
Should you?
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.
A savings bank account will earn you just 3.5% per annum. The average one-year return of such funds is 4.94% (as on January 2, 2006).
Of course, you will not get the spectacular returns of an equity fund. But you will not face the threat of your investment being reduced to nothing.
Since most funds do not charge either an entry or exit load (and neither does Fidelity), you really don't have much to lose. These loads are just fees that are a percentage amount of the money you invest or withdraw.
Fidelity MultiManager Cash Fund will be initially available for subscription from January 2 - 4, 2006. If you miss it this time, it will reopen on January 10, 2006.