Ask Value Research VoicesMain aim of a cash fund is to preserve principal and provide liquidity at the same time
Ask Value Research

Ask Value Research

VoicesMain aim of a cash fund is to preserve principal and provide liquidity at the same time

Short-term Investment
I wish to invest for a very shot period, say for five to ten days. Can you suggest a fund, which is risk free and generate moderate returns?
-Bhaskar Gupta

There are plenty of funds that suit your requirement. An ultra short-term debt fund or a cash fund (as they are usually called) may be the right choice for you. The principal objective of a cash fund is to preserve principle 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. In the past three months, if an investor had remained invested in a cash fund for at least a week, his money would have grown by an average 0.12 per cent (annualised 6.24 per cent). Since your investment horizon is also between 5 to 10 days, these sort of returns should allure you.

But please take note that cash funds are not risk-free. In fact, no mutual fund is risk-free, as they are not assured-return products. Cash funds too invest in market instruments, thus they are susceptible to market risks. However, the risk is negligible in case of cash funds as they invest in instruments which are at the lowest end of the risk-return continuum.

Unlike other debt funds, cash funds generally do not have a CDSC (contingent deferred sales charge). Thus, you can invest and exit on any day without worrying about the load.

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.

Dividend Distribution
My investment spans across several equity funds. None of them have paid any dividend through the entire last year, though their NAVs were well above the NFO price of Rs 10. Aren't mutual funds required to distribute profits to investors?
-Shivam Kumar

Funds pay dividends from the distributable surplus available to them. This surplus comes from the realised gains and these have to be greater than any accumulated losses in the fund. A simple way of finding out if a fund is in a position to pay dividends is to check its net asset value. An NAV of above Rs 10 per unit shows that a fund is in a position to pay dividends. However, the dividend distribution by a fund is at its discretion. There is no guarantee that a fund will pay dividend even if it has a distributable surplus. This seems to be the case with the funds that you have invested in. But the more important point is that you should not worry too much about the dividends in equity funds. The purpose of equity fund investing is long-term growth of capital and this happens irrespective of the fact that you are in the dividend option or the growth option.

Why Offer Document?
Why are offer documents important? What is it that I should look for in it before investing?
-Meera Lal Kapoor

The prospectus or the offer document is your guide to the nuts and bolts of a mutual fund. It outlines all the information you need to make a decision about whether or not to purchase the fund. Here are a few of the key areas that you need to read.

Investment Objective: This is what a fund does with its assets. A fund's name is not always a clear indication of its strategy. Here you will get know if the fund invest in stocks, bonds or a combination of both, whether it will invest in large-cap stocks, mid-cap or both; and whether a fund is diversified etc.

Investment Pattern/Strategy: This section gives you details on the asset allocation, like how much it will invest in equity and debt. If it is an equity fund, then it tells you how much will be invested in large-cap and mid-cap, or the maximum exposure it will take in a particular sector. If it is a debt fund, the prospectus will have details on the allocation between corporate bonds and government securities and what its maturity profile will be under normal circumstances. Hybrid funds of various kinds increasingly have complex asset allocation models that need to be studied carefully.

Fees, Expenses and Load: Don't skip this section-it is one of the most important parts of the prospectus. Does the fund have a load or is it a no-load fund? What are the operating expenses charged by the fund? Are there any fees or charges for withdrawing your money?

Performance Highlights: This section is only valid if it's an old fund. This table displays the return, total assets and NAVs of the fund. Performance highlights also include any dividends the fund has paid. This information will be an indicator as to how it has performed over the long run. But you do have to always remember that the past performance is not a guarantee of future performance.

Fund Mechanics: The prospectus also spells out the methods of purchasing, redeeming and making additional investments. What is the minimum initial investment? These policies may vary from fund to fund. So be sure to read through the prospectus carefully.

The fund prospectus includes a great deal of valuable information. You should at least go through these before investing in a fund, which you think is just right for you.

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