Couple of years ago, interest on savings bank account was deregulated. Thereafter, some banks voluntarily started paying as high as 7% interest to saving account customers. It was believed that, this might make liquid and liquid plus funds less attractive. But month after month this segment of mutual funds continued to witness inflows as returns generated by these funds were attractive. Liquid and liquid plus funds are one of the ideal avenues for parking your short term surpluses. But recently, few mutual fund houses decided to raise the expense ratio of their liquid funds by 20 basis points (bps) (0.20%).

Why mutual funds want to charge you more?
Asset Management Companies (AMCs) are of the view that it is difficult to manage schemes with a low expense ratio and also remain profitable. Moreover, fund houses feel that with the norm of SEBI to keep 2 bps (0.02%) aside for investor education and awareness, maintaining a low expense ratio becomes extremely difficult. It becomes imperative to know whether a hike in expense ratio would make liquid funds less attractive.

In order to cover operational and management costs, every mutual fund house incurs certain expenses, which can be measured by their 'expense ratios'. Different fund houses may have different expense ratios for different types of funds. Usually the expense ratio of equity funds is higher than that of liquid funds. PersonalFN is of the view that the scope of generating index beating returns is lower in case of liquid funds as compared to equities. Hence it is important that the expense ratio of a particular scheme stays competitive. If a fund house which is already charging a higher expense ratio goes in for a further rise then it will eat into returns generated by the fund.

Current Scenario
In case of liquid funds, there is a huge disparity in the expenses charged by various schemes. The expense ratios of these funds fall in the range of 0.09 to 2.70 (as per the latest disclosed portfolios). While about 2/3rd schemes have expense ratios lesser than 1.0, about 1/3rd have an expense ratio greater than 1.0. At present, most of the liquid funds are generating higher returns than those earned on saving bank account.

It is important for you to know that, liquid and liquid plus funds invest in short term money market instruments such as Certificate of Deposits (CDs) and Commercial Papers (CPs). These instruments bear coupon rates higher than the rate at which banks pay you interest on your savings bank account. Lower maturity profile makes liquid funds less vulnerable to interest rate risk and thus chances of capital erosion are very remote in case of these funds. Considering this, PersonalFN believes those funds which have reasonable expense ratios may not become unattractive.

Also, PersonalFN is of the view that while selecting any fund for your portfolio you should concentrate on the risk-reward matrix which makes you aware about the risk profile of the fund and its reward potential. Despite of a slight increase in expense ratios, money market mutual funds are still a good investment option to park your short term surpluses. Although expense ratio is an important criterion while analysing a scheme (especially in liquid and liquid plus funds), it is also vital to check for the performance of the fund. Consistency in performance across time frames must also be observed while investing in any liquid fund. Also, liquid funds generating poor returns yet charging high expense ratios should be avoided.

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hemarani720@yahoo.com Jul 12, 2018 investors
hemarani720@yahoo.com Jul 12, 2018 investors

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