Solid returns from liquid funds

If you need to invest your excess cash so that it earns more than your savings account, liquid funds that have delivered 7 to 8 per cent annually over the last five years are ideal avenues.

Returns from these funds clearly trump your savings accounts that offer 4-6 per cent. Of course, the risk profile is marginally higher compared with savings accounts.

In the last one year, while the ‘underperformers’ delivered 7 to 8 per cent, there are many funds that clocked returns in the 8.5 to 9 per cent range. Returns have differed owing to the different portfolios of these funds.

Liquid funds are primarily invested in money market instruments such as certificate of deposits (CD), treasury bills, commercial papers (CP) and term deposits, with maturity up to 91 days.

Given the short tenure of these securities, they are not traded in the market and instead held-to-maturity by the funds, thereby reducing the risk.

However, within the portfolio, higher allocations to CPs issued by companies carry higher risk and offer higher yields than CDs.

Currently, a three-month CP offers 9 per cent yield while CD offers 8.7 per cent. By taking exposure to slightly more risky securities, the fund has been able to generate higher returns. Similarly, Principal Retail Money Manager Fund has, on an average, invested 60 per cent of its assets in CDs.

But there are others that have a more balanced portfolio. For instance, HDFC Liquid, on an average, invested about a third each in CDs and CPs, and about a fifth in fixed deposits of banks over the last one year.

Similarly, SBI Magnum Insta Cash has invested nearly a third in CDs while investing about half in CPs. At the other end of the spectrum, funds that have underperformed have not invested aggressively in securities. For instance, Franklin India Cash Management, for most of last year, kept a fourth of its assets in cash, thus earning lower returns.

Given that liquid fund returns are usually in single digits, the expense ratio makes a notable difference to a fund’s performance. The expense ratio on liquid funds varies from as low as 0.08 per cent to as high as 2.6 per cent.

On an average, funds have an expense ratio of about 0.4 per cent. Top performing funds such as HDFC Liquid Fund, (0.15 per cent), JM High Liquidity Fund (0.24 per cent) and Sundaram Money Fund (0.16 per cent) have lower expense ratios.

This is also because these funds have a large corpus. For instance, HDFC Liquid Fund has a corpus of about ₹16,645 crore as of August 2014.

SBI Premier Liquid has an asset base of ₹27,000 crore.

It delivered 9.4 per cent in the last one year with an expense ratio of 0.17 per cent.