That is what ultra short term debt funds are capable of delivering But the real question is whether such a high return is sustainable
08-Jun-2007 •Research Desk
If you feel that money is becoming dearer, well then your hunch is absolutely correct. But if your EMIs have gone up, well then, the return on debt instruments has also improved. A look at the weekly returns over the past six months of liquid funds (Categorised as Debt: Ultra Short Term funds) reveals that the returns have improved by 1.7 percentage points.
But here is the bad news - There is a lot of talk about returns on these liquid funds being diluted owing to the buoyancy in liquidity seen of late. Money doesn't seem very dear when there is enough of it floating around. Many liquid funds have been saddled with huge inflows, and fund managers seem to have run out of avenues to invest this money. The fear is that gains will be diluted and existing investors are likely to take a hit. However, such liquidity in all likelihood will be temporary and the effect on the returns of such funds will not be very acute.
But seen from a different perspective, a return of 8 per cent (net of expenses) on a short term investment is in itself an abnormality. A more realistic band would be 5.75 - 6.5 per cent. Hence, a correction in the returns of these funds is inevitable. But the extent of this correction will depend on what the central bank decides to do in the coming months.
Those of you who have been excited about your liquid funds performing well, ought to be prepared to see a rationalisation in the coming months.