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B. Venkatesh

PIONEER ITI Money Market Account has generated average returns of over 7 per cent. The returns compare well with other retail short-term fixed-income instruments. Investors may consider taking exposures in the fund.

Suitability: The fund is suitable for those looking to increasing their returns on funds in savings bank accounts. Specifically, those with a longer investment horizon may not find this fund very rewarding.

Portfolio: The fund typically invests in call money, commercial papers (CPs) and short-term corporate bonds. Investment may consider the following factors before buying into the fund:

First, the fund provides better returns than the savings bank account, as yields on CPs and short-term corporate bonds are higher. The same holds for returns from the call market; this refers to the market where banks and primary dealers borrow for, typically, one to 14 days.

The flip side is that the unit-holders cannot derive advantage of the concave shape of the yield curve. This refers to the shape of the yield curve where term spreads on short-term bonds are higher than those on long-term bonds. The difference between the ten-year and the one-year yields are higher than between the 30-year and 10-year yields.

More specifically, funds that have invested in bonds with over five-years maturity but less than 10 years may benefit from the current shape of the yield curve. The Money Market Account loses out on this count due to its very short-term investment objective; the fund is, hence, unsuitable for those with a longer horizon.

Second, as the fund invests in very short-term instruments, the net asset value is computed on an accrual basis. That is, interest on the call money and CPs are added to the NAV on a daily basis.

The unit investments, therefore, generate returns in the same way as fixed deposits. Besides, units in the fund can be redeemed at anytime after a lock-in of 15 days. The liquidity is, therefore, far higher than that of the short-term fixed deposits.

Third, there exists the possibility of the unit-holders earning windfall gains. This is a function of call rates rising in the event of the rupee falling sharply against the dollar in the forex market. When the rupee falls, more customers demand dollars. Banks, therefore, borrow heavily in the call market to buy dollars to deliver to their customers. The demand for call money pushes up call rates, which works in favour of the Money Market Account, as it lends money in that market.

In all, unit-holders with short-term investment horizon can consider buying units in the fund.

Background: The Money Market Account does not levy entry and exit load, though the units are subject to a minimum of 15 days lock- in. The minimum amount needed to buy units in the fund is Rs 10,000. The NAV is always constant at Re 1.

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