Ara_Liquid Mutual Fund

www.aramanagementsolutions.com

Give your Surplus Cash the Liquid Fund Advantage!


A Sensible Alternative to Savings & Current Account Balances.


IS THERE A BETTER ALTERNATIVE?

Generally, money required in the short-term is parked in Savings Bank (SB) account or in Bank Fixed Deposit (FD) accounts.

There is a growing realization that the returns from the above avenues are low and often, not very tax efficient.

www.aramanagementsolutions.com An alternative called Liquid Fund

• Your money that lies in a savings bank account fetches you 4% interest per annum. Some banks offer a slightly higher interest rate of 6% for a higher investment limit.

• There’s an alternate avenue that works almost like a SB account, providing liquidity, safety and fetches you a bit more than a bank account.

• This avenue has returned as high as 7.5% to 8%** on an average in the past one year period, daily on an annualised basis.

• This alternate investment option is called - Liquid fund.

Interest Rate Per Annum

Savings Deposit

Current Deposit

Fixed Deposit

Upto 7 days

4% to

6%* Nil

NA

7 days to 45 days 5.25%

46 days to 179 days 6.50%

180 days to 210 days 6.75%

211 days to less than 1 year 7.00%

Source: www.sbi.co.in (as on April 1, 2016) Premature penalty for Fixed Deposits of up to Rs. 5.00 lacs will be ‘NIL‘, provided the deposits have remained with the bank for at least 7 days. For Fixed deposit above Rs 5.00 lacs but less than Rs 1 crore, the prepayment penalty will be 1% for all tenors. * 6% interest is applicable only for investments above a higher threshold as specified by the bank. ** Source: Live Mint , “Why your money box needs a liquid fund”dated February 29, 2016.

How much does a bank deposit earn for you, in the short-term?

www.aramanagementsolutions.com What is a Liquid Fund?

• Liquid funds are open-ended debt mutual fund schemes that invest in short-term money market instruments. They can be considered an alternative to your SB account for parking surplus cash, with an opportunity for better returns.

• Salient Features – No negative impact on capital – No lock in period – No entry or exit load – Liquidity T+1 – Money-market linked returns – Different products for different investment horizon – Not for wealth creation but ideal for cash accumulation

• Liquid funds are ideal for investors who need an avenue to park surplus cash

for anywhere between one week to three year time horizon.

www.aramanagementsolutions.com Liquid Fund vs Bank Deposits

PARAMETER LIQUID FUND CURRENT ACCOUNT SAVINGS ACCOUNT TERM DEPOSIT

Liquidity

T+1

No lock in. No penalty for

redemption

Transaction day Transaction day

Up to T+1

Lower returns for

premature closure

Returns Money Market linked >8%* None 4-6%* 7.25%

Taxation**

Dividend: DDT @ 28.84%

STCG (<3 yrs): Slab rate

LTCG (>3 yrs): 20%

None

Interest up to

Rs.10,000 exempt.

Slab rate after that

Taxable

Risk

Low liquidity risk

Low interest risk

No stock market exposure

Nil risk Nil risk Nil risk

Investment

horizon Minimum 2 days No limit No limit Minimum 7 days

Data in the table above are as on March 31, 2016. * 6% interest is applicable only above a higher threshold deposit level. ** Refer slide 09 (Taxation options) for more details on taxation.


Asset Allocation (%)

Certificate of deposits 92.4%

Commercial paper 5.01%

Short term deposits 0%

NCA/ CBLO/ Reverse Repo 2.59%

100.00%

Where do they invest?

• Liquid funds invest in short term money-market Instruments i.e. with maturities up to 91 days.

• Typical money market instruments:

– Treasury bills

– Reverse-Repo

– Call Money & CBLO

– CPs and CDs

– Corporate debt

– Short term NCDs

– Floating rate securities

– Securitized debt

Liquid Fund - Sample Portfolio Composition*

Asset class Risk Profile

Money Market Securities Credit Risk Price Risk

Treasury Bills NIL Low

Reverse-Repo Low Nil

Call Money & CBLO Low Nil

CPs and CDs Low Low

Corporate Debt Low to medium Low to medium

Short Term NCDs Low to medium Low to medium

Floating Rate Securities Low to medium Low to medium

Securitized debt Low to medium Low to medium

Asset Class & Risk Profile

* For the purpose of illustration. Actual portfolio may vary.

www.aramanagementsolutions.com Risk involved

• Liquid fund investments are typically subject to two key risk factors, namely interest rate risk and credit risk.

– Interest Rate Risk

• Interest rate risk relates to the effect of changes in market interest rates on the price of the investment.

• Since liquid funds invest in short term debt instruments, interest rate risk is negligible and typically only very sharp movements in interest rates (movements of more than 2% to 3% over short periods of time like a few days) would affect NAVs of such funds.

– Credit Risk

• Credit risk is the risk of default, on either interest or principal payment, by the issuer of the bond/ money market instrument.

• AMCs mitigate credit risk by investing in instruments with superior/ good credit quality and by holding a diversified portfolio of securities.

• Historically, incidents of defaults in debt mutual fund holdings have been minimal.

To mitigate risk, consider the below key points:

High credit quality, diversified portfolio.

Money-market returns > SB account returns.

www.aramanagementsolutions.com Risk & Return

High Risk

Low Risk Liquid Funds

Gilt Funds

Debt Funds

Balanced Funds

Index Funds

Diversified Equity Funds

Sector Funds

Low return High return

Fixed Maturity Funds

Ultra Short Term Funds

Short Term Funds

www.aramanagementsolutions.com Taxation options

It is advantageous to opt for* Dividend option in the Short Term (for investments < 36 months). Growth option for Long Term (> 36 Months). *Specific recommendations can be further considered based on income tax bracket and financial needs. DDT – Dividend Distribution Tax

Liquid Fund

Dividend Option (Tax Free in the hands of Investors. But, DDT deducted by

MF)

Growth Option (No TDS)

With Indexation (20% + applicable surcharge & education cess, after adjusting indexed cost of acquisition)

Short Term Capital Gain (Added to your income and taxed according

to slabs)

Individual/HUF (DDT is 28.84%)

Long Term Capital Gain - > 36 Months

Corporates (DDT is 34.608%)

www.aramanagementsolutions.com How Liquid Funds work better than Savings Accounts

Parking your money in a liquid fund makes more sense than letting it lie idle in a savings bank.

Returns are simple annualised, compound annualised post-tax return. *Short-term capital gains tax for mutual funds and income tax for bank accounts. We have assumed that a liquid fund returns 8% a year. A 30 day return would then translate to 0.66%.

www.aramanagementsolutions.com Liquid Funds - Advantages

A liquid fund can make use of right opportunities in the fixed income market to make additional returns.

Avoid spending: Liquid funds also help to swipe away surplus balances from your bank so that you can avoid impulsive spends on your debit card.

Create corpus: Create corpus for yearly payments such as Insurance premium, child’s education, travel plans, etc.

Accumulate corpus: Start an SIP in liquid funds till the time your corpus reaches the desired level and not worry about spending it on something else.

Instead of opening multiple bank accounts for different goals, you can just have differentiated liquid fund portfolios.

Stop gap investment – When you are undecided about where to deploy idle/ surplus cash, it can be parked in a Liquid Fund.

Path to investing in equity – Instead of investing a lump sum, park your money in liquid fund and start an equity SIP through the STP (systematic transfer plan) option provided by mutual funds.

www.aramanagementsolutions.com Who should consider?

Ideally suited for short term funds that are currently parked in savings bank account, current account or short-term FDs.

Investors who have a short-term horizon, low risk appetite and better returns expectations for their money.

Types of investors:

Individual investors

HNIs

Corporates

www.aramanagementsolutions.com In Conclusion

The best liquid funds have returned as high as 7.5-8%* on an average in the past 1-year period, daily, on an annualised basis. But going forward market liquidity could decide rates.

Liquid funds offer better returns than savings & current account deposits.

Liquid funds offer superior liquidity (at better returns) compared to bank FDs.

Liquid funds are ideal for parking money that you may need to withdraw between one week to six month time horizon.

Liquid fund investing based on tax slab: 10% & 20% tax slabs – opt for growth option. 30% tax slab – opt for daily dividend reinvestment option.

* Source: Live Mint , “Why your money box needs a liquid fund”dated February 29, 2016.

www.aramanagementsolutions.com About Ara

Ara Management Solutions (Ara) is a Bangalore based financial services and wealth management company that is dedicated to taking the stress out of investments and managing money. It was started in 2009 by Mr. Shreedhara Bhat, who has over 12 years of experience in managing investments of discerning investments in Bangalore. “We create the most suitable financial solutions completely customized for our investors as per

their preferences.”

We offer simple yet comprehensive range of investment services that help our customers plan, manage and nurture their finances for a secure, comfortable and rich future. We have a track record of consistently helping customers navigate through different market conditions including the exuberant highs to the devastating lows with sensible investment strategies and services.

We manage investments of over 250 individuals and their families with the shared objective of helping them realize their wealth creation and various life stage goals.

PRODUCTS & SERVICES: Mutual Funds, Fixed Income Products, Financial Planning and Retirement Solutions. WHO SHOULD CONSIDER ARA: Individual investors and their families. Corporate investors including Trusts, Associations, Partnerships, LLPs, Companies and other corporate entities.

www.aramanagementsolutions.com Contact Us

S-05, Concourse, Lower Ground Floor, ITPL, Whitefield, Bengaluru 560066. Karnataka.

+91 80 40981827 | +91 95388 84304

[email protected]


OFFICE INSIDE ITPL. SERVICE AT YOUR DOORSTEP!

ARA MANAGEMENT SOLUTIONS PRIVATE LIMITED

www.aramanagementsolutions.com Disclaimer

Mutual Fund Investments are subject to market risks, please read Scheme Information Document before investing. Mutual Fund Units involve investment risks including the possible loss of principle. Past performance is not indicative of future performance and it may or may not be sustained in future. The future value of investments may rise or fall with changes in the market. ARA Management Solutions Pvt Ltd is not responsible for any error or inaccuracy or for any losses suffered on account of information contained in this document. This document does not purport to be an offer for purchase and/or sale of mutual fund units or any other financial products. M/S ARA Management Solutions Pvt Ltd or its employees cannot be held liable for any loss or sufferings incurred because of any such investments. The information provided in this document is of a general nature and has been prepared without taking into account investors personal needs, financial circumstances or objectives. Illustrations made in this document are hypothetical and are not meant to depict the circumstances of any individual. Before acting on the information in this document, please consult your investment and tax advisors regarding your individual situation and its appropriateness for your circumstances and requirements. The information contained herein should not be copied, altered or reproduced in any form. It cannot be transmitted/ distributed, in part or as a whole, to any other person and/or media.

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Ara_Liquid Mutual Fund