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When Short is Stout: Ultra Short Term Funds v/s Savings Account March 15, 2011
Author : iFAST


Untitled Document

Ultra Short Term Funds

Savings Account Deposit

Investment product:

Type of a debt mutual fund product which provides reasonable returns in the short term as well as offers liquidity.

 

It is the operating account that you hold with your bank to carry out your day-to-day transactions.

Better Returns:

A fund manager mainly invests in a portfolio of short-term debt and money market instruments (see Chart 1^).

 

 

A mandatory return of 3.5% set by RBI for all banks.

Reduce Tax Burden:

Tax rate applicable is only 13.519% for Dividend option for all investors belonging to retail and HUF category. (see Table 1)

 

 

Tax rate of 10%, 20% and 30% is applicable as per individual income slab

Easy liquidity:

Provides you with the flexibility to enter and exit the fund easily, anytime (read explanation below).

 

 

The money rests in your savings account. 

Expense:

Ranges between 0.30% to 1.10% at present

 

 

NIL

Mark-to-Market:

If the portfolio is invested in MTM instruments (maturity over 90 days), the fund can be volatile as the bond yields would be subjected to market movements. Hence, returns are variable.

 

 

Fixed return

Product That Gives Better Post Tax Return

In the example below, we have calculated the gains and the impact of differential taxation on an amount of INR 1 lakh. Do note that the return assumed for Ultra Short Term Fund is net of expenses as discussed above.

Table 1: Comparison between savings account deposit and investment in an Ultra Short Term Fund

 

Savings Account

Ultra Short Term Funds

 

Case I

Case II

Case III

Return expected

Fixed

Variable

Variable

Variable

Annualised return (%)

3.5

4.5

7

8

Accumulated amount INR

103500

104500

107000

108000

Gain on investment INR

3500

4500

7000

8000

Post Tax Return (@20%) INR

2800

3892

6054

6918

Difference in Return (%)

 

39%

116%

147%

Post Tax Return (@30%) INR

2450

3892

6054

6918

Difference in Return (%)

 

59%

147%

182%

Product that Yields More than Your Savings Account

The present scenario of tight liquidity and high interest rates presents investors with an opportunity to invest at prevailing high bond yields. Chart 1 shows the trend in Yield-to-Maturity (YTM) of the money market instruments such as Certificate of Deposits (CDs) and Commercial Papers (CPs) issued by banks and corporate respectively and of our Recommended Funds

As seen here, the YTM is a steady and upward curve and it is currently trading at an attractive level. Hence, the retail investors who have surplus funds with them for a period of 3-6 months can consider Ultra Short Term Funds for investing. Since the liquidity is expected to ease from April 2011, investors should try and invest now to take advantage of the rising interest rate scenario.


Chart 1^: Historical Gross YTM

 

 

 

 

(source: Fundsupermart.com compilations, Birla Sun Life AMC, DWS Investments, and BNP Paribas Mutual Fund)

Product That You Can Buy/Sell anytime

Ultra Short Term Fund category is suitable for investors who have short term savings and an investment time horizon of 3-6 months. Since these are an open-ended mutual fund, investors can choose to enter or exit the fund anytime. To invest, you can submit a request online at Fundsupermart.com. Likewise the withdrawal, and normally, the proceeds would be credited in your account in T+1 day. For example, if you submit the request before 3pm today, then you may get the redemption amount by the next day. But, if the request gets registered after 3pm, you shall receive the money the day after.

 For some funds, an exit load is applicable which ranges between 0.15% and 0.25% for holding period of less than 7-15 days.

Product That Helps Meet Your Short Term Financial Goals

Here, we have assumed three instruments giving a CAGR return of 4.5%, 7% and 8% and the cumulative value at the end of 3 years. The illustration shows the opportunity cost on your invested money which increases over a period of time.

Thus, one can park the surplus funds that may be needed after a period of 3-6months in Ultra Short Term Funds and gain from the yield differential, if any or more.

We have listed below our recommended list of funds from Ultra Short Term Fund category. These funds are selected from 40 Funds that are available in the market due to superior performance, lower expenses and consistency (learn more>>).

Chart 2: Power of compounding

Recommended Funds


Recommended Funds 
Performance (Annualised) % Buy  
1 year 2 years 3 years 5 years

BNP PARIBAS MONEY PLUS FUND- GROWTH 

6.23

5.82

7.07

7.38

 

BSL ULTRA SHORT TERM FUND- GROWTH 

6.23

5.38

6.44

7.30

 

DWS ULTRA SHORT TERM FUND- GROWTH 

5.75

5.31

6.55

6.98

^DISCLAIMER ON USING YIELD TO MATURITY

YTM does not represent and should not be taken as the past, expected or actual returns on investment in any mentioned fixed income mutual funds. Further, it is not a forecast or projected yield and is not indicative of the future or likely performance for any of the fixed income mutual funds. The YTM on a fixed income mutual fund is not equivalent to and cannot be compared with the yield on bonds that are held to maturity.

This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice. Mutual Funds are subject to market risk. Read all scheme related documents carefully before investing.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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