Where do the best overseas investing opportunities lie now?

Countries across the world are recovering differently from the COVID-19 pandemic. The varying extent of infections, stringency of lockdowns, and government stimuli mean that countries are looking at different recovery curves, and therefore present differentiated opportunities. This is segregating markets that are usually clubbed together, as emerging or developed markets, and splitting up the usual baskets for global investing.

Recent Fitch and Bloomberg studies on emerging markets highlight this divergence. According to the reports, indicators such as market performance, GDP outlook, and fiscal debt place countries such as India, Indonesia and South Africa on a different footing than other emerging economies such as China, Korea and Taiwan. A similar divergence can be seen in the developed markets, with the still raging virus and political uncertainty threatening current valuations in the US. Table 1 presents our estimates of global GDP growth over the next four quarters.

From a retail investor's perspective, this makes entering international markets a bit more complicated. However, the need to diversify is stronger than ever, as concentrating your investments in one market may expose you to greater risk of uncertain recovery. This is especially true for the Indian market; Indian equities are looking at an uphill struggle due to a weak capex cycle, continuing demand and supply shocks with a rising COVID-19 graph, bank credit de-growth and no immediate relief from fiscal stimuli.

Amidst all the uncertainty, and the contradictions in economic outlook and market behaviour, we are looking at two key indicators for our research recommendations in this period: rate of economic recovery from COVID-19, and outlook on equity valuations. Let's look at how these indicators can help us identify a steady course of action in global investing.

(R)Acing the curve

Different timelines and intensities of COVID-19 infections have led to different states of unlock across countries. Nations that are past the peak of COVID-19 infections have been able to kick-start their economies, posting better-than-expected trade and manufacturing data, and will therefore benefit from greater price momentum as optimism builds up. For example, research estimates that the 2021 growth for Australia and New Zealand, countries with early success in flattening the curve, will be higher than the US .

China, the earliest country to cross the peak, has been pegged by the IMF as the only economy in the world to avoid a contraction this year, while its growth in 2021 and 2022 is expected surpass that of its peers. This estimate is supported by expansionary service and manufacturing PMI data since May, and the country's ability to counter disruption to supply chains and foreign demand through domestic production and demand.

In turn, the steady recovery in macro conditions across the second half of 2020 are creating headroom for further expansion in both, earnings per share and price to earnings ratio (PE) for China A and China H equities. We estimate potential upsides of 20 per cent and 60 per cent, respectively for the China A and H equities over the next two years.

When compared to India, therefore, whether in terms of economic growth or potential market returns, China's position on the curve is its biggest advantage right now. Looking forward, with India's GDP expected to shrink, and its earnings recovery uncertain, China represents a strong diversification opportunity for investors.

Valuation windows

For an illustration of the valuation opportunities in global markets, we can look at the Eurozone. Rated ‘Neutral' as a market by our global research desk since last year, the Eurozone entered a recession in the second quarter this year on the back of already anaemic growth. However, better-than-expected economic recovery, the recent agreement on the Euro 75 Bn EU Recovery Fund, along with European Central Bank's planned quantitative easing up to end-June 2021, have significantly improved economic sentiment and investor confidence in the region.

With more than half of Europe's STOXX 600 index comprising cyclical sectors, the region's equities are particularly well-positioned to benefit from this economic rebound. Given the structural composition, European equities (especially in comparison to the US) tend to have a heavier weight in ‘cheaper' sectors. Even the valuation for Europe's IT sector remains greatly below that of the US. Investing in Europe thus offers a play on value, and should benefit during the expansion phase of the business cycle.

According to a recent Bank of America Global Fund Manager Survey report, fund managers have been rotating into European equities, seeking greater exposure. There was significant rotation into European equites in August, making it the topmost overweight region at that point. The survey further reveals that Fund Managers' current positions in Europe have still not reached their long-term average, indicating a continuation of inflows if the pandemic is kept in check.

Valuation-wise, we believe European equities are trading cheaper than their estimated FY21 earnings, and our team expects a long-term upside potential of +18.4 per cent by end-2022. This is relatively attractive within developed markets, and also offers Indian investors the opportunity to invest in larger, more stable companies at fair prices.

Conclusion

As markets everywhere remain noisy in the aftermath of the pandemic, and economic and market data create divergent views, knowing the right parameters to look at can make all the difference. Investing via mutual funds remains the best bet for retail investors new to global markets, whether through feeder funds available in India, or as direct investments abroad. The Indian market is already reflecting this, with September inflows into Fund of Funds investing overseas showing a 470 per cent increase over August inflows.

How you must choose among ultra-short, low and short-duration funds

Are you aware of the number of categories of debt funds?

For the uninitiated, the answer is 16. Yes. That's not a small number. And hence, it's natural for retail investors to feel confused as to which categories are suitable for their investments. On the shorter side of the debt fund maturity spectrum, lie three categories that many investors are interested in: ultra short duration, low duration and short duration funds.

What is the difference among these categories and how should you choose what is suitable for you?

Segregation based on maturity

At a very basic level, the categorization is based on the maturity profile of the funds.

That is, the funds in these categories invest in debt and money market instruments so that:

-Ultra-Short Duration Funds - Macaulay duration of the portfolio is 3-6 months

-Low Duration Funds - Macaulay duration of the portfolio is 6-12 months

-Short Duration Funds - Macaulay duration of the portfolio is 1-3 years

The Macaulay duration is a technical term. But simply speaking, it refers to the weighted average maturity of bonds/papers in a fund's portfolio after factoring in all the cash flows.

In general, the higher the duration, the higher is the interest rate risk. Since low-duration funds take a slightly higher duration stance, they also carry higher interest rate risk. Similarly, short duration funds carry higher interest rate risk than low duration schemes.

One thing that most investors don't realize is that if the average duration is 3-6 months (like for Ultra-short duration funds), it doesn't mean that all the papers/bonds held by the fund will be maturing in 3-6 months. It is just the average profile of the fund's portfolio. So some bonds in the portfolio would be maturing in the next 1-3 months while some other might be maturing in the next 2-3 years!

Sounds odd right? But that is how averages work.

And there is another aspect to this. Due to the mismatch between the average maturity figure and the actual individual maturity timelines, the funds may carry a little more interest rate risk than what their category (or average maturity profile) might tell you. So you need to be careful about what you see and what you make of it.

What about credit risk?

Structurally, ultra short duration and low duration funds are more suited for taking lower credit risk due to their shorter maturity profile. Short-duration funds on the other hand can take comparatively higher credit risk as they have the comfort of the longer maturity profile for their portfolio.

Sadly, the existing categorization guidelines only refer to the duration of the scheme portfolios. Nowhere does they prescribe any credit rating profile for these three categories.

So, fund managers are free to take as much credit risk as possible to try and generate extra returns. This will work at times. But it may also not work occasionally. And this is what happened in the on-going debt fund fiasco of Franklin India AMC. Try to understand it like this.

Suppose you want to choose between two ultra-short duration funds, namely A & B. You check the maturity profile and it's within SEBI specified limits of 3-6 months. Now you look at the historical returns. You see that the fund A has given much higher returns. You decide to figure out the reason for this outperformance. You open the bonnet (check funds' portfolio) and realize that fund B has 95 per cent of its assets invested in high-credit (AAA) rated papers. On the other hand, fund A has invested only 25 per cent in AAA-rated papers, while the rest of it is parked in lower-rated, riskier but high-yield securities. So the fund manager of fund A is taking extra credit risk to generate high returns.

Since we are talking about debt funds, it's best not to take too much risk in debt. Risk taking should be limited to the equity side of your portfolio.

So, when should you invest in these three fund categories?

Ultra short duration and low duration funds can be used for short-term investments which are due in more than a few months, but up to a few years. Short duration funds are suitable as the debt component for medium to long-term portfolios. It's not suitable if you plan to park your money for just a few months or 1-2 years. But having said that, even ultra-short and low duration funds can also be part of your long-term portfolio. Or, one can hold a combination of these categories to have a well-diversified (maturity timeline) debt fund portfolio.

Choosing debt funds is not easy, though it's simple. Do not go after high returns alone. Stick to large well-diversified debt funds that give reasonable returns but don't compromise on credit quality and hold highly-rated securities.

How to disclose dividends and capital gains on MFs while filing tax returns

Many of us would have dipped into our mutual fund (MF) investments before March 31; the end of the financial year 2019-20. But withdrawals from MFs attract tax. Here's what you should know about how gains are taxed.

Are dividends and capital gains taxed?

Budget 2020 made dividends taxable. However, for the year (FY) 2019-20, dividends are tax-free. So, if you've earned dividends till March 31, 2020, then your dividends were tax-free in your hands. However, your fund house would have paid dividend distribution tax (DDT) of 29.12 percent, including tax and surcharge in the case of a debt fund and 11.648 percent for an equity fund. The same should however be reported under Schedule-EI of the relevant ITR of AY (Assessment Year) 2020-21.

Now, in the current financial year (FY 2020-21), you would need to add dividends earned to your income and it would be taxed as per your slab.

Sale proceeds from mutual funds are also taxed, depending on how long you've held on to your MF units. For equity funds, if you sell your units within one year, it is termed as short-term capital gains (STCG) and taxed at 10 percent. If you sell your equity fund units after a year, then that is long-term capital gains (LTCG) and taxed at 15 percent.

For debt funds, the threshold is three years. Units sold within three years will attract STCG tax, which is your normal bracket. Any LTCG from your debt fund units are taxed at 20 percent with indexation benefits.

How to report MF gains and losses?

Several taxpayers treat gains or losses from the sale of shares/MFs as ‘income from capital gains,' while others treat it as ‘business income.' CBDT (Central Board of Direct Taxes) has issued a circular giving a choice to the taxpayers of how they want to treat such income. “Once the taxpayer selects an option, he/she must continue with the same method in subsequent years also,” says Rahul Garg, senior tax partner, PwC India.

If the individual selects ‘business income' then such income is to be reported in Schedule BP of the ITR form. Alternatively, if an individual opts for capital gains, then such transactions should be reported in Schedule CG of the ITR form.

I have bought and sold many MF units in the past year, including systematic investment plans (SIPs) and systematic transfer plans (STPs). Is it possible to get a concise report of all my mutual transactions?

Yes, it can be quite a cumbersome task to keep track of all your schemes that you've bought and sold. Especially, if you invest a lump-sum amount in, say, an equity fund, though an STP from a liquid scheme. Each such transfer calls for a sale of your liquid fund units and a purchase of your equity scheme units.

Fortunately, registrar & transfer (R&T) agents offer help. Computer Age Management Services (CAMS), one of India's largest R&Ts offers various such reports on its website that give you details of your capital gains, dividend income returned and so on.

You do not need to submit scheme-wise details of your dividend or capital gains income. But segregate income earned from equity-oriented schemes and debt schemes, because both these categories attract different tax rates. “However, it will be prudent for people to preserve these documents in case the tax officer asks for such documents or requests for a clarification about the transactions reported in the returns,” PwC's Garg says.

What happens if the individual incurs losses in an equity or debt fund? Can he/she set it off against other heads or claim deductions? Where should he/she report it in the ITR?

Any loss arising from transfer of units of mutual funds can be of two types—short-term capital loss and long-term capital loss. Long-term capital loss can be adjusted only against LTCG whereas short-term capital loss can be adjusted against short-term as well as long-term capital gains. “If the loss cannot be set off or adjusted in the same year, then the unadjusted capital loss can be carried forward for 8 years and set off only against income from capital gains, provided the return of income in which loss is incurred is filed on or before the due date of filing the return,” PwC's Garg says. The amount of loss shall be auto-populated under relevant the schedules of ITR such as Schedule CG, Schedule CYLA, Schedule CFL and Part B-TI.

Should the individual report each and every transaction involved in selling of MF units in the ITR?

In the case of short-term capital gains (STCG), there is no requirement of reporting each and every transaction involved in selling of MF units. For long-term capital gains (LTCG), the scrip wise details in the return of income for FY 2019-20 should be filled up as they are eligible for the benefit of grandfathering.

The Finance Act 2018 grandfathered the investments made in listed equity-oriented MFs on or before 31-01-2018 as the LTCG arising from the sale of such units were previously exempt from tax. “The scrip-wise reporting is required (under Schedule 112A) only in respect of long-term capital gain arising from transfer of listed equity oriented mutual funds acquired before 01.02.2018,” says Naveen Wadhwa, deputy general manager, Research and Development, Taxmann Publications, a leading publisher on taxation and corporate laws.

“In any other case, the aggregate amount of capital gain arising from transfer of units of mutual funds can be reported in Schedule CG,” he says. “In case you had invested in the MF through systematic investment plans (SIP) route, the holding period for each such SIP will have to be calculated separately,” Garg says.

Explained: Where do debt mutual funds invest?

It's easy to understand where equity funds invest and how they generate returns. They buy and sell equity shares. When share prices go up, equity funds generally tend to gain.

But debt markets work differently. To put it simply, it's a market place for borrowers to borrow money and lenders who are willing to lend. Timely payment of interest and principal is crucial. And because retail investors usually cannot buy them directly (face value of one bond is typically around Rs 1 lakh), there is little understanding on how such debt instruments work.

Where do short-term debt funds invest?

Typically, such funds invest in instruments that mature within a year. They include TREPS (Tri-Party Repo), repurchase agreements (repo), Certificates of Deposits (CDs), Commercial Papers (CPs), T-bills and so on. Banks, Non-banking finance corporations (NBFCs), PSUs, corporates and the Government issue such money market instruments to meet their short-term funding requirements.

Repo and TREPS are the instruments used to provide loan for the very short term of, say, overnight or up to a year. Repo allows institutions such as banks and NBFCs to borrow funds by putting up government securities as collateral. These firms can also lend in the repo market. Interestingly, mutual funds can only lend in the repo market (barring extreme conditions).

To vitalise the debt market, the RBI recently allowed repos to be backed by corporate bonds as collateral.

Interestingly, even equity funds park their short-term surplus in the repo market.

Short-term debt funds also invest in CDs, CPs and T-bills. These are also instruments that allow the borrowers – banks and corporates – to borrow for their short-term needs. Banks issue CDs, corporate firms issue CPs and the government issues T-bills through the RBI. Typically, CDs are rated higher than CPs and come with better credit quality. That is also why CPs come with slightly higher interest rates to compensate for their sometimes lower credit rating.

Most of these instruments are zero-coupon bonds, which are issued with discounts. For instance, a three-month T-bill of Rs 100 (face value) may be issued at say Rs 98, that is, at a discount of Rs 2. At maturity, the issuer repays the face value of Rs 100. So, the return to the investors is Rs 2.

While short-term debt funds invest a significant chunk of their corpus in such avenues, long-term debt schemes too invest a sizeable portion. 

Where do long-term debt funds invest?

Government securities: The safest among long-term instruments are government securities (g-secs). The central government needs funds to run its day-to-day operations and finance the fiscal deficit. Apart from other avenues such as tax, it also borrows money from the debt markets, through the RBI, its banker, by issuing g-secs. State governments, too, borrow by issuing State Development loans (SDLs).

Since these instruments are backed by sovereign guarantee, they are the safest and most liquid. G-secs can come with maturities as long as 40 years. G-sec mutual fund schemes predominantly in these gilts. But other debt and hybrid funds, too, hold g-secs to manage their duration (interest rate sensitivity) and maintain a good credit mix.

Bonds and Debentures: Likewise, when companies need to borrow money for their long-term requirement, they issue bonds and debentures. These come with tenors of 1-15 years. But since corporate bonds do not come with a government guarantee (unlike g-secs and T-bills), they carry higher credit risk. To compensate, they also pay higher interest rates.

Therefore bonds also come with credit ratings. Unless, you invest in a credit risk fund, go for bonds that invest sizeably in highly-rated instruments. Typically, bonds issued by government-owned companies are considered safer than private-sector firms, but that is not always the case.

Note that short term debt funds too hold certain portion in G-Secs and bonds with short residual maturity of, say, less than a year.

Securitised debt: Securitized debt instruments are securities that are created by securitizing individual loans.

Simply put, a bank has a car loan portfolio worth Rs 1000 crore. To free up the capital, the bank creates debt instruments (which are called pass-through certificates or PTCs) backed by the asset, which is the car loan portfolio here, and sells to the mutual funds and others.

Technically, a securitization transaction involves sale of receivables by the originator (the bank) to a Special Purpose Vehicle (SPV), typically set up in the form of a trust. Investors (mutual funds) are issued rated PTCs, the proceeds of which are paid as consideration to the originator.

These securitized debt instruments are rated by the rating agencies. Mutual funds prefer holding only those rated AAA.

Risk of investing in securitized debt is similar to investing in debt securities. In January 2019, a few debt funds from Aditya Birla and HDFC mutual funds were hit as the SPVs of two road projects owned by IL&FS, which they held, defaulted on interest payment.

A few mutual fund schemes allocate 0.2-10 per cent of their portfolios to these instruments. As on August 31, 2020, MFs held Rs 9,685 crore in such securitized debt instruments.

Why is KYC important? (KYC- Know your customer)

Why is KYC important?
Know Your Customer, popularly known as KYC, is a mandatory compliance procedure that RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India) has specified for the banks and other financial institutions such as asset management companies (AMCs), insurance companies and stock broking firms, among others.

Under KYC, financial institutions collect certain important information pertaining to the identity of the client - whether an individual or institutional. This is done in order to increase the legal vigilance so that the cases of fraudulent monetary transactions, money laundering etc., can be minimized.

According to its KYC guidelines in 2002, RBI had directed all the banks to be fully compliant with the KYC norms by 2005. With digital innovations, KYC can be done online as well as in paper mode. Under KYC procedure, the information pertaining to the name, name of spouse and parents, address and its proof, PAN number and Aadhaar details, other valid identity proofs, details of education and profession etc. are collected.

Importance of KYCKYC is very important compliance requirement because it:

1. Establishes the truth and veracity of the customerBanks and other financial institutions enter into business with a multitude of people. As handling sensitive matters related with finance, institutions need to establish the authenticity of the identity of these people - whether individuals or business organizations. KYC helps the institutions collect sufficient proof as to the same purpose.

2. Helps keep track of the transactionsKYC helps financial entities to avoid transactions with persons or organizations involved with corruption, politically exposed persons (PEPs), and those with criminal motives such as terrorist financing and fraud. By following the KYC norms correctly, financial organizations can ensure that their services aren’t misused.

3. Is an important risk management strategyAs the KYC procedure detects the entities with suspicious background early on, it effectively minimizes the instances of money laundering, theft and other monetary fraudulent practices in a sector as sensitive and critical as banking and financial services industry.

Financial institutions, after collecting and verifying this information, send it to the KRAs (KYC Registration Agencies). KRAs upload the same in central database. In the event of any changes in the information in future, only the relevant section is updated.

The following documents are declared as OVDs (Officially Valid Documents) by the Central Government for the purposes of KYC procedure:

PAN Card
Aadhaar Card
Passport
Driving License
Voter’s Identity Card
NREGA CardIf you haven’t completed the KYC procedure, walk into the nearest branch of any financial institution with the above documents and get it done at the earliest.

How to fulfill KYC requirements as per CKYC norms

 How to fulfill KYC requirements as per CKYC norms

All individual investors of mutual funds are now required to fulfill KYC requirements as per Central KYC norms.

A CKYC form can be obtained from the AMC or can be downloaded from the AMC/ KRA website or registrar.

Central KYC or CKYC is a government initiative to bring KYC process of all financial sector entities under a single window.

CKYC is managed by CERSAI (Central Registry for Securitisation Asset Reconstruction and Security Interest of India).

All individual investors of mutual funds are now required to fulfill KYC requirements as per CKYC norms.

CKYC form:

A CKYC form can be obtained from the AMC or can be downloaded from the AMC/ KRA website or registrar.

Information:

Though PAN is not a mandatory information to be filled as per the CKYC form, since the PAN is mandatory for security markets KYC, the form has been modified to make the information mandatory. The form also captures Aadhaar, date of birth, investor’s maiden name and mother’s name in addition to the earlier KYC form.

Documents:

Duly filled and signed form along with the following documents (self attested) should be submitted along with one photograph:

* Proof of identity

* Proof of address Copies must be supported by original documents for verification at the time of submission

FATCA information:

The CKYC form also contains FATCA declaration that must be filled up by the investor.

Process:

Once the form is submitted, the information provided will be verified and a unique KIN (KYC Identification number) will be generated and communicated to the investor by SMS/email. Some KYC Registration Agencies (KRAs) provide information on status of CKYC wherein the investor can key in PAN and their KYC status is displayed.

Points to note:

* Currently CKYC is applicable only to individual investors (resident and NRI).

* Existing investors who have already completed KYC under earlier process do not have to undergo any additional KYC requirements under CKYC

How To Calculate NAV of Mutual Fund

You can calculate the NAV of a mutual fund by dividing the total net assets of the fund by the total number of units issued to investors.  When it comes to investing, certain terms have special significance. For mutual fund investors, net asset value (NAV) is one such term. Whenever you attempt to buy or sell mutual fund units, this acronym comes up.In simple terms, NAV is the per-unit market value of a mutual fund. Read on to find out how to calculate the NAV of a mutual fund and more.

SBI Magnum Children's Benefit Fund- NFO

Dear All,

We are happy to announce the launch of

*SBI Magnum Children's Benefit Fund* - _*Investment Plan*_

Below are the key feature:

*NFO Details:*

*NFO Opens* on:September 08, 2020

*NFO Closes* on:September 22, 2020

*Allotment Date*:September 29, 2020

*Type of scheme:*

An open-ended fund for investment for children having a *lock-in for at least 5 years or till the child attains age of majority* (whichever is earlier)

*Minimum Application Amount during NFO (Rs.):*

Rs. 5,000/- and in multiples of Re. 1/- thereafter

*SIP Facility also during NFO period and on an ongoing basis:*

The Scheme also offers Daily, weekly, Monthly, Quarterly, Semi-Annual & Annual Systematic Investment Plan (SIP) during NFO period and on an ongoing basis.

*Benchmark Index:*

CRISIL Hybrid 35+65 -Aggressive Index

*Fund Manager:*

_*Mr. R Srinivasan*_ – Equity

_*Mr. Dinesh Ahuja*_ - Debt

_*Mr. Mohit Jain*_ shall be the dedicated fund manager for managing overseas investments under the scheme

*Investment Objective:*

The investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity related securities of companies across sectors and market capitalizations. The scheme will also invest in debt and money market instruments with an endeavour to generate income. However, there can be no assurance that the investment objective of the Scheme will be realized.

*Asset Allocation:*

⭐Equity and Equityrelated instruments including equity ETFs - *65 - 100%*

Risk Profile : High

⭐Debt, including debt ETFs and money market instruments - *0 - 35%*

Risk Profile : Low to Medium

⭐Units issued by REITs and InvITs - *0 - 10%*

Risk Profile : Medium to High

⭐Gold ETF's - *0 - 20%*

Risk Profile : Medium to High 

*Other Details :*

The scheme may seek to invest in foreign securities including ADR/GDR/Foreign equity and overseas ETFs and debt securities subject to Regulations. Such investment may not exceed 35% of the net assets of the scheme.

Exposure to domestic securitized debt may be to the extent of 20% of the net assets.

Exposure to equity derivatives (including writing covered call options in line with SEBI guidelines) may be to the extent of 100% of the net assets.

The scheme may invest in debt derivatives to the extent 20% of the net assets of the scheme.

As per SEBI circular SEBI/HO/IMD/DF2/CIR/P/2017/109 dated September 27, 2017, the Scheme may indulge in „Imperfect hedging‟ using IRFs upto maximum of 20% of the net assets of the scheme.

The Scheme can take exposure up to 20% of its net assets under securities lending and borrowing mechanism.

The scheme may invest in Repo in Corporate Debt as permitted by SEBI.

The scheme may invest in Mutual Fund units including ETFs to the extent of 50% of net assets.

Regards,

DSN Murthy 

SBIMF

What are Liquid Funds?

1. What are Liquid Funds?

Liquid funds are a type of debt funds that invest in financial instruments such as bank fixed deposits, treasury bills, commercial papers, and other debt securities with maturities up to 90 days. The NAV (Net Asset Value) of the liquid funds is calculated for 365 days, unlike other debt mutual funds where NAV is computed for business days only. Liquid funds have no restrictions of a lock-in period. The withdrawal of liquid funds is processed within 24 hours on business days. So, for all transactions received within cut-off time (say 2 p.m.), where the money is also realised within the cut-off time, then the units are allotted as per the NAV of the previous day. Liquid funds have the lowest interest risk associated with all the classes of debt funds. This is because they primarily invest in fixed income securities with a short maturity. Another notable benefit of liquid funds is that they do not have any entry or exit load.

2. Who should invest in Liquid Funds?

Since these funds provide liquidity and not high returns, it is advisable for investors searching for options to park their idle money to consider liquid funds as a viable option. However, investors should not invest their entire emergency corpus in liquid funds as the redemption of the funds will credit the money only on the next working day. Ideally, liquid funds are suitable for achieving short-term financial goals. Since some funds generate around 8% to 9% returns, they should be preferred over a regular savings bank account which offers returns in the range of 4% to 6%. The nature of liquid funds’ portfolio allocation is such that there is hardly any risk, volatility, or default associated, provided one invests in the high rated (AAA or AA) liquid funds.

3. Things to consider as an investor

a. Fund Objectives

Liquid funds are least risky among all the debt funds. The NAV doesn’t fluctuate too frequently as the underlying assets have maturity period in the range of 60 days to 91 days. This prevents the NAV of liquid funds from getting impacted by the underlying asset price fluctuations. However, there might be a chance of a sudden drop in NAV. This can happen due to a sudden decline in the credit rating of the underlying security. In simple words, liquid funds are not entirely risk-free.

b. Expected Returns

Historically, liquid funds have offered returns in the range of 7% to 9%. It is way higher than the mere 4% returns obtained on a regular savings bank account. Even though the returns on liquid funds are not guaranteed, in most cases, they have delivered positive returns on redemption.

c. Cost

Liquid funds levy a fee to manage investments, called ‘expense ratio’. The Securities and Exchange Board of India (SEBI) has mandated the expense ratio to be under 2.25%. Considering the hold till maturity strategy of the fund manager, liquid funds maintain a lower expense ratio to offer comparatively higher returns over a short period.

d. Investment Horizon

Liquid funds are exclusively for investing the surplus cash over a short duration, say up to three months. Such a short horizon helps to realise the full potential of the underlying securities. In case you have a longer investment horizon of up to one year, then you may consider investing in ultra-short-term funds to get relatively higher returns.

e. Financial Goals

If you want to create an emergency fund, then liquid funds can prove to be very useful. Also, you receive higher returns, and this will help you to take out your money quickly in case of emergencies.

4. How to evaluate Liquid funds?

a. Fund Returns

Fund performance plays a significant role in the selection of relevant funds. You may seek funds that have delivered consistent returns over different time horizons. Choose the funds that have outperformed their benchmark and peer funds consistently. However, you must analyse the fund performance, which matches your investment horizon to get relevant results.

b. Fund History

Track record of the fund house is an essential criterion while selecting a fund. Fund houses that have a strong history of consistent performance in the investment domain may be trusted to stay resilient during slumps and market rally. A fund house which has a consistent track record for at least 5 to 10 years is the one you can choose.

c. Expense Ratio

Expense ratio indicates the operating efficiency of a mutual fund scheme. It shows how much of your investment is used to manage the expenses of the fund. A lower expense ratio interprets into a higher take-home return for the investor. Choose a fund with a lower expense ratio, which can give you better performance.

d. Financial Ratios

In addition to using plain vanilla returns, there is a range of financial ratios available, which can be used to analyse the performance of the fund from different perspectives. You may use tools such as standard deviation, Sharpe, alpha, and beta ratios to examine the risk-adjusted returns and relative riskiness of a fund. A fund having higher standard deviation and beta is riskier than a fund with lower beta and standard deviation. Look for funds having a higher Sharpe ratio which means it gives higher returns on every additional unit of risk taken.

5. Top 10 Liquid Funds in India

When selecting a fund, you need to analyse the fund holistically. Various quantitative and qualitative parameters can be used to arrive at the best liquid funds as per your requirements. Additionally, you need to consider your financial goals, risk appetite, and investment horizon in mind. The following table shows the top 10 liquid funds in India based on the returns in the last three years. Investors may choose the funds based on different investment horizons like three years or ten years returns. You may consider other criteria such as financial ratios as well.