These schemes are a good choice for investors contemplating a large investment in equity funds.
Instead of investing all the money in one go, they can do so in a staggered manner by parking it in these schemes and then transferring it to equity mutual funds through a systematic transfer plan.
Cash-rich investors looking for short-tenure avenues are in a sweet spot.
Liquid and overnight funds, which are ideal for parking money for a short period -- a week to a month -- are providing annualised yield to maturity (YTM) surpassing 6.5 per cent, higher than the average return of 3.5 to 4 per cent offered by savings bank accounts.
"The Reserve Bank of India has increased the policy rate by 250 basis points since May 2022 to 6.5 per cent. The banking system's liquidity has remained in neutral to deficit for the past several months," says G Pradeepkumar, (CEO, Union Asset Management Company.
'Consequently, short-term rates (one day to 91 days) of money market instruments (treasury bills repurchase or TREPs, treasury bills, commercial paper, and certificate of deposit) have been elevated -- in the range of 6.75 to 7.5 per cent. This has made liquid and overnight funds attractive," Pradeepkumar adds.
Low-risk options
Overnight schemes invest in money market instruments and bonds maturing within one day, whereas liquid funds target those maturing within 91 days.
"Due to the short-term maturity of the bonds these funds hold, they carry low-interest rate risk. Their investment strategy also prioritises high-quality bonds, hence they have low credit risk," says S Sridharan, founder and CEO, Wallet Wealth.
Joydeep Sen, corporate trainer and author, concurs.
"These funds carry inherently lower risks. Even during the default cycle of 2018-2019, only two liquid funds suffered default issues. Many more debt funds in other categories had suffered default issues."
Upswing in returns
Over the past year, overnight funds and liquid funds (direct plans) have yielded returns of 6.67 per cent and 7.03 per cent, respectively.
"Liquid funds offer the possibility of generating reasonable returns with minimal risks," says Pankaj Pathak, fund manager for fixed income, Quantum AMC.
The net YTMs of liquid funds and overnight funds (direct plans) is 7.1 per cent and 6.7 per cent respectively, so these schemes are poised to deliver good returns in the foreseeable future.
Impact of falling rates
With the US Federal Reserve signaling three cuts in 2024, interest rates are expected to decline.
As these funds invest in very short-term bonds, their entire portfolio gets repriced at frequent intervals.
In the case of overnight funds, the entire corpus is reinvested daily.
"Interest rates are likely to be revised downwards over the next year. This might affect the returns of liquid and overnight funds adversely," says Sridharan.
These schemes cannot lock in interest rates.
Avoid exit load
While overnight funds do not charge an exit load, liquid funds do so in a graded manner.
"Liquid and overnight funds provide liquidity and can be redeemed whenever one needs funds. However, be mindful of the exit load applicable to redemptions within seven days in liquid funds," says Pradeepkumar.
Not for the long haul
View liquid and overnight funds as short-term parking spaces for your money.
"Although their yield levels are still good, they are not suited for investors with long-term investment horizons. They may be considered if people want to park money for a few weeks or months," says Pradeepkumar.
If you have exited an investment or sold a large asset and have money on hand, park it in these schemes for better returns than savings bank accounts.
"Liquid funds are simple, straightforward products, ideal for short horizons. They are suitable for all investors for the temporary or cash-equivalent portion of the portfolio," says Sen.
Systematic transfer
These schemes are a good choice for investors contemplating a large investment in equity funds.
Instead of investing all the money in one go, they can do so in a staggered manner by parking it in these schemes and then transferring it to equity mutual funds through a systematic transfer plan (STP).
Doing so will reduce the timing risk of investing in equities.
While the money is parked in these schemes, it will earn decent returns.
Capital gains on units of liquid and overnight funds are taxed according to the slab rate.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Aslam Hunani/Rediff.com
