HDFC Liquid Fund -- Ideal for the short term

B. Venkatesh

HDFC Liquid Fund has returned 9 per cent since last October. The returns compare favourably with other retail short-term fixed-income investments.

Those with a short-term investment horizon may consider buying into the fund for fair returns.

Suitability: The fund is suitable for those wanting to enhance returns from short-term surplus money available in their savings bank account. Those with a medium-term investment horizon who do not mind sacrificing returns for lower risk may also consider buying into the fund.

Portfolio: As of October 30, 2001, the fund had 75 per cent in short-term corporate debentures, 16 per cent in commercial papers, 8 per cent in calls and the balance in government securities and certificate of deposits. The average portfolio maturity of the fund is 116 days.

The fund appears a good investment for the following reasons:

First, the fund's high exposures in short-term corporate bonds will benefit the unit-holders. The reason is that such instruments provide higher yields than the treasury-bills (T-bills). Normally, higher returns on corporate bonds are a compensation for the risk of the companies' defaulting in the payment of interest and principal. Unitholders need not worry on this count, as the default risk is normally low in the case of short-term corporate instruments.

Second, the NAV is calculated on an accrual basis, as the fund primarily invests in short-term instruments. That is, the NAV changes everyday, based on the daily interest earned on the instruments held.

This lowers the NAV fluctuation and is, therefore, attractive to the risk-averse investors; the average fluctuation in monthly returns since last October is just one-sixth of one per cent. Investors should, however, note that the fluctuation in the NAV would increase should the fund take large exposures in bonds with maturities of over six months; for the NAV will then be calculated on a marked-to-market basis.

Third, the fund offers good portfolio diversification to those who invested in Pioneer Money Market Account and K-Gilt Savings Plan. This is because the Money Market Account invests primarily in calls and T-bills, while the K-Gilt Plan has sizable exposures in short-term government bonds.

Fourth, the fund provides good liquidity to investors. Direct investment in corporate bonds, typically, requires locking into the money till maturity. This is because investors cannot easily sell these bonds, as they are not frequently traded in the secondary market. By investing in the HDFC Liquid fund, unit-holders can reap the higher yields offered by corporate bonds and yet enjoy the liquidity, as the fund offers easy exit option.