• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

B. Venkatesh

HDFC Liquid Fund generated an average annualized return of 4 per cent, which is substantially higher than the interest rate on savings bank account. Those who switch between cash and equity can use this fund to enhance cash returns.

Investors may consider the following factors before buying units in the fund: The fund has sizable investments in corporate bonds. On the positive side, such an exposure will enable the fund to generate higher returns. The reason is that the return on corporate bonds is a function of the market price; an increase in market price will thus improve the returns for unit-holders.

The flip side is that the risk is also higher. If the market value of these bonds declines, the net asset value (NAV) will fall. In the event, investing in the fund to enhance returns instead of keeping the money in the savings bank will be defeated. The fund also has substantial exposure in money market instruments. As interest rate on CPs and T-bills is higher than savings bank account, unit-holders stand to benefit by investing in the fund. Moreover, the risk in money market instruments is similar to that of the savings bank account. In both cases, the investor is exposed to reinvestment risk. This is the risk that the investor may have to reinvest the proceeds at lower rate should interest rates decline.

Of course, an investor will not face reinvestment risk if she invests in HDFC Liquid Fund to enhance cash returns. Suppose an investor receives Rs 15,000 from selling shares of Infosys and chooses to re-enter the stock market 10 days hence. During this period, she can invest in HDFC Liquid Fund to enhance her cash returns; the alternative will be to keep the money in the savings bank account.

Note that an investor may also choose to invest in Liquid BeES instead of buying units in a liquid fund. The problem with Liquid BeEs is that the investor will have to pay commission to brokers, which may lower the cash returns. In comparison, entry to and exit from HDFC fund is costless.

Finally, the fund continually changes its asset allocation; exposure to money market instrument has ranged between 10 per cent to 45 per cent with the rest in corporate bonds and bank deposits. Such changes in asset allocation can enhance returns if the fund successfully times the market. In short, investors looking to enhancing their cash returns can buy units in this fund.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Prabhat India: Accept

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line