Investors opting for systematic transfer plans (STPs) are in a tizzy. The average one-year return of liquid, overnight and money market funds is just 3.19 percent. State Bank of India pays 2.75 percent on savings accounts, and Bank of Baroda gives 2.75-3 percent. Small finance banks pay up to 7 percent savings bank interest.
Why are low returns from liquid funds a cause for worry? An STP was touted as the ideal way to invest in equity funds by moving money steadily from liquid schemes. For the time that your surplus lies in the liquid fund, it earns a higher return than your savings bank interest. That advantage has diminished as interest rates have gone down in the past two years.
Exit loads
STP helps to deploy large sum into equity funds in a staggered manner. Debt funds can come with exit loads. Liquid funds have a falling rate of exit load (0.007percent to 0.0045 percent) on investments till the seventh day from the day of allotment of units.
Plan your switches in such a way that exit loads don’t hit you.
Chase safety, not returns
The role of a debt fund is to preserve your capital and possibly give you better returns than a fixed deposit. For liquid funds, savings bank accounts would be better for comparison.
“Returns should come from equity funds. For your source funds (debt schemes), safety of principal with as little volatility as possible, is more important,” says Parul Maheshwari, a Certified Financial Planner. She prefers using overnight or liquid funds.
Interest rate risk
Long duration funds face far greater interest rate risks. If interest rates rise sharply, their net asset values (NAVs) fall. Hence, it pays to be a focused on bonds at the shorter end of the yield curve. These include overnight, liquid and ultra short duration funds.
In addition to avoiding interest rate risks, it’s equally important to avoid credit risks. Lower rated bonds carrying high credit risks are picked by some fund managers to spruce up returns. However, this strategy can backfire if the bonds default. Hence it makes sense to stick to schemes offering portfolios with highest credit ratings. “After the Franklin Templeton bond scheme closure episode, most fund houses are staying away from credit risk. However, you should double-check the portfolio’s credit quality before investing,” says Vinayak Savanur, Founder and CIO at Sukhanidhi Investment Advisors.
Savings bank account or a debt fund?
In present times, it’s a tough choice. Since some banks pay a higher interest rate, they make for a compelling choice. However, understand the conditions to be satisfied for getting higher savings rates. For instance, some banks advertise higher rates, but those are subject to maintaining a higher minimum balance. Plus, opening a new bank account just for your STP, especially if that bank’s branch is not in your locality, can be time-consuming.
Joydeep Sen, debt market trainer and founder, wiseinvestor.in says that psychologically a debt fund works better as the money would have already gone out of your hands, even if it just sits in your liquid fund, pending deployment. “But if the money lies in their savings bank, some investors might get tempted to use it up and cancel the SIP,” he says.
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