Categories: BlogInvestment Questions & Answers

Two Important Takeaways for Liquid Funds

We had quite a few happenings in September with respect to reputed firms running up defaults on their bonds. Some banks also ran deep into a similar mess, so much so that the RBI refused to allow extensions to their CEOs. It is a good time to reflect on the takeaways.

Liquid Funds Are Meant to be Liquid

We all use liquid debt funds to park cash for any emergency requirements or for short term requirements. Liquid funds are a sub class of debt funds and they invest in bonds of the government or other companies. The investee companies promise to return the interest and sum invested.

The IL&FS Saga

Some debt mutual funds had an impact in September, as they invested in IL&FS group companies. IL&FS is not able to service its debt and as a result its bonds have fallen in value. Rating agencies which till recently gave it a very high rating (A1+ as recently as August 2018) have now marked it as D.

This rating downgrade of IL&FS was sudden and took all by surprise. Mutual funds had to mark down the value by about half.  One such fund is Principal Cash Fund which has been a consistent top performer till recently. IL&FS holdings are approx 10% of this fund.

How Should The Investor React?

As a result this fund has incurred two drops in the NAV. The fund has already taken a majority of the hit in its NAV. We estimate that if they were to write off the entire investment in IL&FS, this fund could further fall by 2%.

In the past there were two such instances: Amtek auto where one fund took a high exposure; 85% funds were eventually recovered. Anothet was JSPL where % of funds were recovered.

The fund hasn’t yet sold off the IL&FS paper which means that it will try and recover some part of the holding. LIC is also interested in fixing up things. SBI and HDFC are also involved. Therefore if there is bail out, your NAV might recover.

Conclusion

To sum up, the two takeaways from this episode:

1. Do not seek highest returns in liquid funds. Need here is safety and hence funds that invest in 90 day T-Bills or Short term G-Sec are preferable.  Quantum Liquid Fund is one such recommended fund.

2.  Diversify ones holdings even in liquid funds. It is almost impossible to identify risk in one company/fund. Since even rating agencies find it difficult to identify risk 100% accurately, diversification is the best solution for an investor, across and within fund classes.

Happy Investing!

Ram Kalyan Medury

Share
Published by
Ram Kalyan Medury
Tags: defaultsliquid fundsmutual fund diversificationnpassafety

  • Blog
  • Cat B
  • Investment Questions & Answers
  • Jama To Invest Smart

Are Free Direct Mutual Fund Platforms For Real?

If you are in the know of things, you might have switched your mutual fund portfolios from regular plans to…

April 9, 2019 9:00 am
  • Blog
  • Financial Advisor
  • Financial Planning
  • Savvy

5 Reasons Why A Good Financial Advisor Is A Great Investment

Conventional thinking is that only the rich can afford a financial advisor. After all, a financial advisor helps accelerate wealth…

December 2, 2018 12:24 am
  • Blog
  • Financial Planning
  • Savvy

12 Point Checklist To Change or Appoint An Investment Advisor

Choosing a right investment advisor could get stressful, more so if you already have an 'advisor' and you need to change…

November 3, 2018 3:39 am
  • Blog
  • How to Invest

Direct Plan Mutual Funds For Just Rs 100 per month

Here is a handy list of funds that are available for an SIP of just Rs 100. Fund Class 3…

October 28, 2018 9:41 am
  • Blog
  • Financial Planning
  • How to Invest
  • Savvy

What To Do When Markets Fall and Mutual Fund NAVs are Down

We are living in interesting times. I wrote last week about the recent mutual fund market correction. Turns out that…

October 26, 2018 1:56 am
  • Blog
  • Direct Mutual Fund Investments
  • Financial Planning
  • Savvy
  • Starter

When “FREE” Backfires! Busting TWO Common Myths on Mutual Fund Platforms

Let me come straight to the point. Investors of Mutual Fund are being increasingly misled on FREE offerings that leads…

August 12, 2018 5:01 am