Kothari Pioneer Money Market Account: Invest

Recommendation: Invest

B. Venkatesh

THE Kothari Pioneer Money Market Account (KMMA) returned 10 per cent (annualised) in the last three months. The returns compare well with short-term bank fixed-deposits even without adjusting for the high liquidity that the investment offers. One may consider investing in this fund for short-term gains.

Suitability: The fund is suitable for those wanting to invest for the short term, say, between one and six months. The fund also provides cheque-writing facility for investments of Rs 10,000 and above. A caveat. Such cheques can only be issued to the self and not to a third party.

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Portfolio: As of October 30, 2000, KMMA had 51 per cent exposure in call money and the rest in T-bills. Investors may want to consider the following factors before buying into the fund.

Consider first the contours of the call market. This is a market where banks and primary dealers (PDs) borrow money from other banks, financial institutions and mutual funds for a period ranging from one day to, typically, 14 days. Call rates fluctuate wildly as they are influenced by the daily demand for money. What about the credit risk? Though call money is lent without collateral, the credit risk to KMMA is not very high as such loans are made only for the short-term and only to banks and PDs.

The call rate is generally above the RBI's bank rate of 8 per cent. This is because banks prefer to avail of refinance facility with the RBI at the bank rate of 8 per cent. There is, however, no upper bound for calls. For instance, call rate moves upwards of 10 per cent when there is heavy demand for dollars. Being a lender in the call market, KMMA can profit from such upside in call rates.

What about T-bills? T-bill yields are generally higher than call rates for two reasons. One, the higher yield is due to the longer maturity period; T-bills are issued for periods ranging from 14-days to 364-days. And two, as PDs borrow on call and invest in T-bills, normal-level call rates are factored in T-bill yields, keeping the latter at a higher level.

The advantage of investing in T-bills is that these instruments are liquid and credit risk-free. It, therefore, enables KMMA to provide decent returns with adequate liquidity and low overall credit risk.

Another factor to be considered is that the NAV of KMMA is always held constant at Re 1. The income earned on your KMMA investment is instead credited in the form of units. Thus, if you invest Re 10 today and the fund earns Rs 1 in two days, you will have 11 units of Re 1 (the NAV price) each in your unit account. This provides a sense of comfort for those who are averse to fluctuations in NAV prices. In the light of the above factors, one may consider this fund for short-term investments.

Background: Kothari Pioneer Money Market Account is a money market fund that invests in short-term instruments. The minimum amount needed to buy units in the fund is Rs 5,000 (Rs 10,000 if cheque writing facility is required).