Here's how you can invest in short term funds

MUMBAI: With swelling savings account deposits, triggered by demonetisation, some short duration funds have now caught the fancy of investors. For, funds such as liquid, ultra-short term, and arbitrage funds have traditionally returned about 7%, compared with 4% that idle pool of savings deposits generally fetch you mostly.

While liquid schemes are up to three-month maturities, ultra-short term funds are of three to 12-month tenures, almost suiting the liquid nature of bank savings deposits.

Arbitrage funds are of equity nature that gains from the price differential in the cash and derivatives market to generate returns.

“We see bank savings deposits as parking lot for funds," said Rajiv Bajaj, vice chairman, Bajaj Capital. "But it cannot be an investment option as they yield returns almost half of the inflation rate. Liquid and short-term funds are the right alternatives, which help you beat the inflation through your savings."

"Many traders/small business owners are now educating themselves, making a beeline for such mutual fund schemes," he said.

Traditionally, people who are averse to keeping their money in savings accounts, park their funds in informal channels earning higher returns with nearly no tax liability.

Bank deposits have expanded by 13.6% year-on-year for the fortnight ended December 9 this year. This is in stark contrast to loans, which grew 5.8%, hitting a 54-year low, show latest data from RBI.

“With a spurt in savings deposits, you need to introspect the use of such funds and allocate a portion for long term wealth creation," said Vineet Arora, executive vice president at ICICI Direct. “A prudent asset allocation will help earn higher returns than any idle money on savings account.”

“While you can keep a portion of liquid funds to meet any kind of exigencies, people in the higher tax bracket can always opt for tax efficient arbitrage funds.”

“Ultra-short term and balanced advantage funds are best suited if you are ready to block funds for six-12 months,” he said.
Liquid funds have mostly returned in the range of 6-7% in the past three months while ultra-short term funds yielded 7-8%, show data from Value Research, a mutual fund analytics firm. During the same period, arbitrage funds yielded as high as 9% with the lowest return at 5.82%.

Some palpable trends are showing up in the mutual fund industry.
“We have seen some uptick in fund flows to those short term schemes,” Lakshmi Iyer, head - products & CIO - debt, Kotak Mutual Fund, said.