Advisable To Park Your Money In Canara Robeco Overnight Fund For Immediate Liquidity Needs?
Jul 23, 2019

Author: Aditi Murkute

(Image source: freepik.com)

Almost a year ago, Infrastructure Leasing & Financial Services (IL&FS) downgrading episode was reported. This pushed liquid funds and debt funds category under severe stress, soon similar corporates shared a similar fate.

Owing to these cases, Debt Mutual Funds were drastically hit since several fund houses had been holding debt instruments issued by these downgraded corporates in an endeavour to achieve higher returns as compared to the bank FDs.

So, when most of the liquid funds posted steep losses. It made the investors aware that debt fund investment isn't completely risk-free.

The damage done to the investors' portfolios was far too much and so the investors have almost lost interest in investing debt funds. Investors have become more conservative, and to achieve their short-term investment goals they are looking for options that are less risky.

So, to retain the investors' interest, many mutual fund houses have been launching overnight funds. Overnight fund is a category of debt scheme emerged after the SEBI's recategorization norms. It is one of the lesser known category of debt mutual funds, that is being considered now due to its shortest investment duration of one day and provides better returns than bank FDs and are more liquid.

Besides in terms of risk, the interest rate risk involved of an overnight fund is least or almost zero but there can be a reinvestment risk, i.e. overnight funds may not be able to reinvest their proceeds at the same rate of return, and that doesn't cause any capital erosion.

Thus, on the risk-return spectrum, overnight funds are placed lowest that carries the least amount of investment risk.

[Read:  Why Comparing Returns to Risk Is More Meaningful!]

Graph: Indicative Risk Return Matrix -Debt Categories

Indicative Risk Return Matrix -Debt Categories


Canara Robeco Mutual Fund has launched an open-ended debt scheme, Canara Robeco Overnight Fund (CROF). The scheme will invest predominantly in debt, money market instruments and cash & cash equivalents having a maturity of one business day.

Thus, it is suitable for conservative investors who want to invest their savings for a time period of one month or less than a year, build an emergency fund and want to earn a reasonable return with high liquidity.

Table 1: Details of Canara Robeco Overnight Fund
Type An open-ended debt scheme investing in overnight securities Category Overnight Fund
Investment Objective To generate returns commensurate with low risk and providing high level of liquidity, through investments made primarily in overnight securities.

However, there can be no assurance that the investment objective of the Scheme will be realized.
Min. Investment Rs 5000 and in multiples of Re 1 thereafter Face Value Rs 1,000 per unit
Plans • Direct*

• Regular

* Default option
Options • Growth*

• Daily Dividend Reinvestment

* Default option
Entry Load Not Applicable Exit Load Nil
Fund Manager Ms Suman Prasad Benchmark Index CRISIL Overnight Fund Index
Issue Opens: July 19, 2019 Issue Closes: July 23, 2019
(Source: Scheme Information Document)


How will Canara Robeco Overnight Fund allocate its assets?

Under normal circumstances, the scheme's asset allocation pattern will be as under:

Table 2: CROF's Asset Allocation

Instruments Indicative allocation (% of net Assets) Risk Profile
Minimum Maximum High/ Medium/ Low)
Overnight Securities* 0 100 Low
*Overnight Securities: Debt and money market instruments with overnight interest rate risk such as debt instruments with one business day residual maturity. Overnight securities include synthetic overnight positions such as reverse repo/tri-party repo & other transactions where the interest rate is reset every business day.
Investments will be made in line with the asset allocation of the scheme and the applicable SEBI and/or AMFI guidelines as specified from time to time.
Investment by Scheme in Securitized debt is limited to domestic securitized debt and shall not exceed 10% of the net assets as on the date of such investments.
(Source: Scheme Information Document)


What will be the Investment Strategy?

The funds will be invested in Debt & Money Market Instruments (with residual maturity not greater than 1 business day,) offering reasonable liquidity and returns, with risk perceived by the Investment Manager. Investments under the Canara Robeco Overnight would be made predominantly in TREPS (Tri party Repo Dealing and Settlement), overnight reverse repos and fixed income securities/instruments with overnight maturity.

The portfolio of the scheme will be constructed and managed to generate returns to match the investment objective and to maintain adequate liquidity to accommodate funds movement.

As per the guidelines of RBI, Mutual Funds have currently ceased to access the call money market. The Canara Robeco Overnight Fund therefore proposes to avail facility of reverse repos / TREPS (Tri party Repo Dealing and Settlement) to temporarily invest for short term liquidity and to meet redemption / repurchase requirements.

The investments may be made in primary as well as secondary markets. As far as possible, the portfolio of the scheme will be adequately diversified to reduce the risk of underperformance, arising out of unexpected security-specific factors. Investments will be made in State / Central Government Securities, Treasury Bills supported by the:

  1. Ability to borrow from the Treasury

  2. Sovereign guarantee or of the State Government

  3. Government of India / State Government in any other manner.

Table 3: Risk associated with Debt instruments that the scheme would invest into

Instruments Credit risk
Call Money Lending Low
MIBOR Low
Central Govt Sovereign
1y Tbill Sovereign
10y G Sec Sovereign
3m PSU Bank CD Low to Medium
3m NBFC CP Low
10y G Sec Low
(Source: Scheme Information Document)


The Scheme will seek to underwrite issuance of Government Securities if any, within the as per the prevailing rules and regulations by SEBI / RBI. The Scheme may also participate in their auction from time to time.

Who will manage the Canara Robeco Overnight Fund?

The Canara Robeco Overnight Fund will be managed by Ms Suman Prasad.

Ms Prasad holds a post graduate diploma in management studies with a specialization in finance and is well experienced the fixed income space.

As the lead fund manager, Ms Suman Prasad manages Canara Robeco Short Duration Fund and Canara Robeco Fixed Maturity Plan Series 8 at the fund house.

Table 4: Performance of the Schemes managed by Ms Suman Prasad

Scheme Name SI Benchmark Name Managing Since Scheme Returns (%) Benchmark Returns (%)
Canara Rob FMP-8 Crisil Short Term Bond Fund Index Oct-18 8.82 7.96
Canara Rob Short Duration Fund Sep-12 7.20 7.20
Data as on July 19, 2019(Source: ACE MF-PersonalFN Research)


As can be seen from the table, Canara Rob FMP-8, has managed to outperform the benchmark index and the returns of the Canara Rob Short Duration Fund has been in line with the benchmark returns.

Some of the other schemes which she co-fund manages at the fund house are; Canara Robeco Ultra Short Term Fund, Canara Robeco Savings Fund, Canara Robeco Liquid Fund, Canara Robeco Gold Exchange Traded Fund, Canara Robeco Gold Savings Fund, Canara Robeco Capital Protection Oriented Fund - Series 7, Canara Robeco Capital Protection Oriented Fund - Series 8, Canara Robeco Capital Protection Oriented Fund - Series 9, and Canara Robeco Dual Advantage Fund Series 1.

The outlook for Canara Robeco Overnight Fund:

Canara Robeco Overnight Fund will invest predominantly in overnight securities in an endeavour to achieve the stated objective of the scheme. The fund manager and her team will do rigorous in-depth credit evaluation of the issuers before making investments.

As part of credit evaluation, a study on the operating environment, past track record as well as future prospects of the issuer, short as well as long term financial health of the issuer will be carried out. The AMC will be guided by the ratings of accredited agencies such as CRISIL, CARE, ICRA etc. as well as the internal norms for credit exposure. Plus, concentration risk will be mitigated by defining issuer limits.

Government and Public Sector Enterprises are the predominant borrowers in debt markets. Initially, the debt markets were regularised, and the interest rate was in line with the repo rates. But lately there has been rapid deregulation and currently, both the lending and deposit rates are market determined.

Besides the overall economy is experiencing a liquidity crunch, thereby impacting the consumer sentiment and current GDP reflects the low demand. Current core CPI inflation for the month of June has increased to 3.18% (the recent figure shared by MOSPI). To control the inflation the Reserve Bank has reduced policy rates by 75 bps so far in 2019. If the inflation rate actually moves up, it reduces the scope of further reduction in policy rates by the RBI to accommodate growth concerns.

Hence, the actual yields of the Canara Robeco Overnight Scheme will vary in line with general levels of interest rates and debt/money market conditions prevailing from time to time. Canara Robeco Overnight Fund will be sensitive to systemic liquidity. Excess liquidity may drag the potential return down and vice-versa.

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This article first appeared on Certified Financial Guardian.  


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