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B. Venkatesh

UNITHOLDERS in Templeton India Money Market Account (TIMMA) earned an annualised return of 4.75 per cent last year. This fund is suitable for two classes of investors. One class of investors represents those who need liquidity. The other class represents those who prefer to construct a diversified portfolio of bond funds.

Portfolio strategy: The fund primarily invests in money market instruments. As of August 31, 2004, the fund had 54 per cent in Treasury Bills (T-Bills), 30 per cent in commercial papers and rest in call and cash equivalents.

The advantage of this kind of portfolio structure is that the unit-holders are not subject to market risk as in the case of traditional bond funds.

Bond funds that invest in securities with maturity above 6 months are required to value their portfolio at the current market price. This means that the net asset value (NAV) will fall if bond prices decline in value.

TIMMA, however, follows an accrual basis for valuing NAV. That is, interest rate on the instruments are credited on a daily basis till they are redeemed. This insulates the unit-holders from fluctuations in the NAV. The fund, therefore, has similar characteristics as bank fixed-deposits.

Style benefits: TIMMA enhances cash returns for the liquidity investors. These are investors who want money in the near-term for personal consumption. Typically, such investors place their money in the savings account.

Investing in TIMMA could provide higher return because the fund invests in the call market, which is market where banks borrow money for one to, typically, 14 days. The call money rate is a function of the demand-supply for money on a given day.

Similar factors govern T-bill yields. If there is more demand for call money, TIMMA may even generate a higher return than that on a short-term bank fixed deposit.

One cause for concern is the high expense ratio of one per cent. Despite that, investors can enhance cash return because of the low interest rate on savings account. Besides, the fund provides good liquidity. Investors can redeem their units after an initial lock-in period of 15 days.

The fund also provides good diversification benefit for those who prefer to construct a portfolio of bond funds. Specifically, TIMMA should be part of a bond ladder strategy. This is a fixed-income strategy where the investor buys equal number of units in funds that have exposure in bonds with different maturities.

Such a strategy helps investors manage their cash flows better because bonds mature at regular intervals. Besides, such a portfolio balances interest rate risk and reinvestment risk because of its exposure across the yield curve.

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