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Benefits of Cash Fund Investing

How does a liquid and cash management fund help in short-term investment and what are the best returns among the mutual funds in these schemes?

How does a liquid and cash management fund help in short-term investment and what are the best returns among the mutual funds in these schemes?
Rajesh Sethi

If you have surplus cash, which you don't need for a week or a month - say down payment for a car or a house, or to buy some assets next month, then cash funds could be an ideal place to park your funds. This investment is likely to help you earn something extra on your capital compared to a bank savings/current account.

Moreover, it is highly liquid as well. Normally, in an equity or income fund, the redemption is on a T+3 basis, but for cash funds, it is on a T+1 basis. Thus, redemption cheques are dispatched the day after submission of the redemption request. Cash funds also provide the benefit of the electronic clearing system, whereby your redemption amount will be directly credited to your bank account the very next day (provided your fund house has a tie-up with the bank in which you have an account). However, it must be said that this redemption takes longer than a withdrawal from a savings bank account, where you could walk out with the money within minutes.

Another benefit of cash fund is that you don't have to worry about the early redemption fees. Most cash funds don't charge any entry or exit load and so the returns generated are the returns received.

However, it must be borne in mind that cash funds, like any other mutual fund scheme, are not risk-free as there are no assured returns. Cash funds too invest in market instruments, and thus are susceptible to market risk. However, the risk is low as cash funds invest in low maturity bonds and money market instruments like commercial papers, short-term treasury bills and bank deposits. These instruments are on the lowest end of the risk-return continuum.

In terms of choosing the best cash fund, there is little to distinguish one fund from another. However, in the past three months, if an investor had remained in a cash fund for at least 14 days, his money would have grown by an average 0.16 per cent (annualised 4.26 per cent). In the same period the top-3 funds returned 0.19 per cent (annualised 5.04 per cent) and the bottom-3 funds gave 0.13 per cent (annualised 3.3 per cent). Given the fact that these funds are meant for short periods, there isn't much to choose by.

Since the yield difference between the best and worst fund is marginal, we suggest you place a premium on low expenses besides stability, consistency and serviceability. Currently, there are nearly 40 cash funds to choose from for a retail investor. In addition, we have almost 30 institutional cash funds especially designed for big-ticket investors. The institutional plans have expenses lower than the retail plans and thus deliver returns that are relatively higher.

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