With short-term yields firming up and likely to hold steady over the next few months, distributors are asking affluent investors to park their money in liquid funds managed by small fund houses.
According to investment experts, fund houses with small liquid fund pools have better chance to provide more ‘per-investor returns’ as their asset bases are small and the returns generated are to be distributed only to a lesser number of investors.
The sales pitch is pretty straight and simple. Assuming there are two liquid funds — fund A having a corpus or Rs 100 crore and fund B with a corpus of Rs 1,000 crore — and both are generating similar returns (say 4.5%) currently . If fresh investments of Rs 25 crore each flow into both these funds, the percentage of fresh money in small fund will be 20% and that of large fund, (percentage of new money) it will be just about 2.5%. If both the funds invest in papers with same yields (say 5.75%), returns generated by the smaller fund will be much larger than the portfolio yield on larger fund (as the proportion of fresh money to overall portfolio is larger in the smaller fund).
“The difference in returns (between the small fund and large fund) could be even higher in current times, as yields on shorter duration papers are firming up after the rate hike by RBI,” said Sujoy Das, head-fixed income, Bharti Axa Mutual Fund. However, Mr Das is quick to point out that large funds sitting on high cash levels will be able to match returns generated by smaller funds in such situations.
Yields of money market papers maturing within 3-6 months have gone up by over 125 basis points, post the CRR hike a few weeks ago. According to experts , despite the rising yields, most debt fund managers will not be investing their money in short-term papers, as they would be wary of corporate investment outflows to meet advance tax payments and bank redemption. This will further jack up yields temporarily for a brief period. If industry sources are to be believed, most fund houses are maintaining cash-levels between 40% and 70% of their liquid portfolio AUM.
“Theoretically, smaller corpus funds will provide high per-investor returns as their asset base is much lower and they will begin investing at higher yields. But then, in these times, even large funds will do well as most of them are sitting on high-cash levels and they will also deploy cash as yields go up,” said Ritesh Jain, headfixed income, Canara Robeco MF. According to Mr Jain, large funds, sitting on cash, will only start investing once they get a clear idea about bank redemption and advance tax outflows in March.
From a retail investor’s point of view, investors should do a cost/reward comparison before investing in smaller funds to jack up portfolio yields. “I’ll stay away from such gimmicks. If I am a liquid fund investor, my sole aim will be to protect my corpus (before permanently investing somewhere else) and get some marginal return on it,” said Mumbai-based financial planner Gaurav Mashruwala.
“If the investor still wants a higher return , he should look at the return differential (likely to be generated on a small fund pool and large fund pool) before adopting this strategy. If the gain (return differential) is just about 3-3 .5% per annum , it is not worthwhile to invest in a small fund pool,” Mr Mashruwala added.
Source: http://economictimes.indiatimes.com/markets/analysis/Small-liquid-funds-promise-big-returns/articleshow/5605481.cms
According to investment experts, fund houses with small liquid fund pools have better chance to provide more ‘per-investor returns’ as their asset bases are small and the returns generated are to be distributed only to a lesser number of investors.
The sales pitch is pretty straight and simple. Assuming there are two liquid funds — fund A having a corpus or Rs 100 crore and fund B with a corpus of Rs 1,000 crore — and both are generating similar returns (say 4.5%) currently . If fresh investments of Rs 25 crore each flow into both these funds, the percentage of fresh money in small fund will be 20% and that of large fund, (percentage of new money) it will be just about 2.5%. If both the funds invest in papers with same yields (say 5.75%), returns generated by the smaller fund will be much larger than the portfolio yield on larger fund (as the proportion of fresh money to overall portfolio is larger in the smaller fund).
“The difference in returns (between the small fund and large fund) could be even higher in current times, as yields on shorter duration papers are firming up after the rate hike by RBI,” said Sujoy Das, head-fixed income, Bharti Axa Mutual Fund. However, Mr Das is quick to point out that large funds sitting on high cash levels will be able to match returns generated by smaller funds in such situations.
Yields of money market papers maturing within 3-6 months have gone up by over 125 basis points, post the CRR hike a few weeks ago. According to experts , despite the rising yields, most debt fund managers will not be investing their money in short-term papers, as they would be wary of corporate investment outflows to meet advance tax payments and bank redemption. This will further jack up yields temporarily for a brief period. If industry sources are to be believed, most fund houses are maintaining cash-levels between 40% and 70% of their liquid portfolio AUM.
“Theoretically, smaller corpus funds will provide high per-investor returns as their asset base is much lower and they will begin investing at higher yields. But then, in these times, even large funds will do well as most of them are sitting on high-cash levels and they will also deploy cash as yields go up,” said Ritesh Jain, headfixed income, Canara Robeco MF. According to Mr Jain, large funds, sitting on cash, will only start investing once they get a clear idea about bank redemption and advance tax outflows in March.
From a retail investor’s point of view, investors should do a cost/reward comparison before investing in smaller funds to jack up portfolio yields. “I’ll stay away from such gimmicks. If I am a liquid fund investor, my sole aim will be to protect my corpus (before permanently investing somewhere else) and get some marginal return on it,” said Mumbai-based financial planner Gaurav Mashruwala.
“If the investor still wants a higher return , he should look at the return differential (likely to be generated on a small fund pool and large fund pool) before adopting this strategy. If the gain (return differential) is just about 3-3 .5% per annum , it is not worthwhile to invest in a small fund pool,” Mr Mashruwala added.
Source: http://economictimes.indiatimes.com/markets/analysis/Small-liquid-funds-promise-big-returns/articleshow/5605481.cms
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