Savvy investors explore techniques for extra bucks

MUMBAI: Even as the equity market scales new highs, savvy investors are exploring new techniques to garner extra money. Corporates and high net worth investors have been taking advantage of the difference in the NAV declaration time between liquid and liquid plus funds to earn some extra returns.

Debt instruments in liquid plus funds have a slightly longer maturity on an average and hence they are classified as income funds, like short and long-term income funds.

So, if a company wants to invest its surplus cash in a liquid plus fund today, it invests in a liquid fund in the morning and switch over to a liquid plus fund later in the day. Although strictly within the rules, this has emerged as a smart way to make money work for an extra day, thereby gaining returns which would have been lost if invested directly in a liquid plus fund.

For companies and high net worth investors, who invest hundreds of crores every time, this extra returns could translate into a handful of crores.

No stranger to the community, liquid plus funds gained popularity after the finance minister hiked the dividend distribution tax for liquid funds (deducted from NAVs) to above 28% (including various cess). Since liquid plus funds are classified as income funds and continue to be taxed at around 22%, they offer a tax arbitrage opportunity.

Today, several fund houses have bigger exposure in liquid plus funds than liquid funds. While liquid funds account for a quarter of the total assets in the industry, liquid plus funds are believed to contribute the largest chunk of the 40% classified under income funds.

For liquid funds, the previous day’s NAV is considered as a basis for investment, which means that an investor will earn returns (or book loss) as much as the NAVgrows from the previous day to the day of investment.

However, if he invests in a liquid plus fund directly, then, only that day’s NAV will be considered for investment. In other words, he loses the previous day’s NAV. Hence, by investing first in a liquid fund and switching over to a liquid plus fund later in the day, an investor earns what the NAV has gained over the previous day.

Since there are no entry loads in either category of funds, fund houses cannot eat away returns in the switching over period. Among debt funds — liquid funds have the lowest maturity of portfolio of 6-9 months, liquid plus funds slightly higher, short-term income funds 1-1.5 years and Gilt funds 3 years.