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Short-term Investing

I often have large amounts of cash available for a few days. Can you suggest any mutual fund for very short-term investment of say, 5 to 10 days, without any risk and with moderate returns?

Can you suggest any mutual fund for very short-term investment of say, 5 to 10 days, without any risk with moderate returns?
V. Narasimha Rao via e-mail

Yes, there are plenty of funds that suit your requirement. An ultra short-term debt fund or a cash fund (as they are usually called) is the relevant fund for you. There are nearly four dozen such funds in India. The principal objective of a cash fund is to preserve principal while at the same time provide high liquidity. Returns are a secondary objective. They are suitable investment avenues for parking short-term money for less than a month or two.

In the past three months, if an investor had remained in a cash fund for at least a week, his money would have grown by an average 0.10 per cent (annualised 5.2 per cent). Since your investment horizon is also between 5 to 10 days, this sort of return should allure you. Moreover, these returns are even better than what you would get in a bank fixed deposit. Currently, SBI offers an interest of 4 per cent per annum on a term deposit for 7-14 days but that is valid for investment of Rs 15 lakh and above. However, in a cash fund, you can invest as low as Rs 1,000 or Rs 5,000.

But please take note that cash funds are not risk-free. In fact, no mutual fund is risk-free, as they are not assured returns products. Cash funds too invest in market instruments, thus they are susceptible to market risk. However, the risk is low as cash funds invest in short-term bonds and money market instruments like commercial papers, short-term treasury papers and bank deposits. These instruments are on the lowest end of the risk-return continuum. However, during volatile times these funds may turn in negative returns, as has been the case in April 2003. One of the funds gave a 7-day return of -0.21 per cent between April 2 and April 9. But in the past three months, the minimum average 7-day return that a cash fund has given is 0.07 per cent (annualised 3.65 per cent) and the maximum is 0.16 per cent (annualised 8.34 per cent). So, the negative return by one fund is very much the exception and not the rule. Nonetheless, this does highlight the fact that there is risk even in these cash funds.

Cash Funds: Investment Details & Performance
Minimum Investment As low as Rs 1000
Entry Load Nil
Exit Load Nil
CDSE Usually no CDSE
Expense Ratio (%) 0.14 - 1.50
Minimum 7-day Return* 0.07% (annualised 3.65%)
Maximum 7-day Return* 0.16% (annualised 8.34%)
* in the past 3 months

Unlike other debt funds, cash funds generally don't have a CDSC (Contingent Deferred Sales Charge). Thus, you can invest and exit on any day without worrying about the load. But there are exceptions like JM High Liquidity and Magnum InstaCash, which charge a CDSC if you redeem within a week.

From the tax point of view, opting for the dividend plan would be a better idea compared to the growth plan. In case of the growth plan, you will be subject to short-term capital gains tax, at the marginal rate and this can be as high as 30 per cent. On the other hand, dividend from debt funds is subject to a dividend distribution tax of 12.81 per cent. Cash funds usually offer weekly dividend and daily dividend options.

As cash funds are commodities, there is hardly any difference in the returns within the universe of cash funds. But, do keep a close eye on the expense ratio. As the returns are already low in cash funds a high expense could eat up a significant part of your overall return. And if you have a large sum, go in for an institutional plan. Here, the returns are slightly better than the normal plan due to lower expenses.

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