If you have surplus funds in hand, which you do not want to lock-in with Fixed Deposits, we have a solution for you. The funds can be parked in Liquid/ Ultra short term funds instead of holding those funds in the savings or current account with the bank.
In the current high interest scenario, the liquid funds can do far better than your savings/current account. The Average return of a Liquid Fund has been close to 9% p.a. , which is equivalent to return from a Fixed Deposit.
- Liquid funds are open ended funds that invest in debt and money market instruments with maximum maturity of up to 91 days only.
- Provides High liquidity to the portfolio with minimum risk to interest rate volatility
Ultra short term funds
- Ultra short-term bond funds are debt funds wherein the fund manager can invest in securities of maturity longer than 91 days, but there is no compulsion to do the same.
- The component of securities with residual maturity more than 91 days is maintained on the lower side, so that the volatility in returns is limited. Returns in these funds are marginally higher than liquids by virtue of the marginally higher portfolio maturity.
When should you park?
- Only when you have surplus money that you need to park for a short period of time in safe instruments, especially money that might be idling in a bank savings account.
- These funds are ideally meant for money that you do not want to block in longer term investments such as shares, fixed deposits, government bonds, etc. Such funds where you need the money back in a few days, few weeks or a few months.
The short term rates in the system shoot up when liquidity position in the system is tight, during the last quarter of the financial year i.e January to March the govt borrowings and Advance tax outgo creates tight liquidity position in the system which may result in better returns in the liquid and ultra short term funds.
For more on short term yields and opportunities refer to our article http://biacap.com/identifying-opportunities-in-the-debt-mutual-funds/