Mumbai: India’s liquid plus funds are fast becoming the new darlings of corporate investors looking for marginally better returns and tax efficiency at slightly higher risk than liquid funds with similar cost, industry watchers said.
Such funds’ assets swelled to about Rs449 billion in July, 89.6% higher than in June, data from Association of Mutual Funds in India, showed.
“Liquid plus has become a category of choice,” Raghvendra Nath, vice-president at Birla Sun Life Asset Management, said.
Investors with a tenure of 15-20 days found his fund attractive as they had potential to offer superior returns than the traditional liquid funds, also called cash funds, he added.
Liquid plus funds gave an average return of 0.6% in the month to August 9, as compared with a 0.47% gain in liquid schemes, data from fund tracker ICRA Online Ltd. showed.
The superior returns come from the slightly higher rate risk that these funds take as compared with liquid funds, he said.
The average portfolio maturity for liquid plus funds was 125.6 days at the end of July. The same for cash funds was 101.1 days, data from ICRA Online Ltd. showed.
“A liquid plus is something which is positioned between a short-term and liquid funds,” Raghvendra, whose fund’s assets have risen more than one-and-a-half times in July, told Reuters.
Returns from liquid plus funds become all the more sweeter as they are subject to lower taxes than cash funds.
“These funds pay lower dividend distribution tax as compared with liquid funds, which made them more attractive to institutional investors,” Dhruva Raj Chatterji, research analyst with global fund tracker Lipper, said.
Liquid plus funds are categorised as debt schemes and pay a lower dividend distribution tax of 14.16 percent for individuals and 22.66 percent for corporates as compared with a flat 28.33 percent for liquid funds.
A fine balance between risk and return and better tax efficiency is also encouraging investors to favour liquid plus funds over liquid funds, Sanjay Santhanam, vice-president at Sundaram BNP Paribas Asset Management Co., said.
“I see more money coming in from existing investors and money coming away from liquid funds into these kind of products.”
Anybody with a slightly longer call preferred liquid plus schemes rather than liquid funds, he added.
The current interest rate environment has also favoured such funds. “With call money rates being below 1 percent for most of July, corporates have parked surplus funds in these schemes to get a better yield,” Chatterji added.
He, however, cautioned that the removal of cap on reverse repo and high call money rates following a hike in cash reserve ratio might prompt corporates to shift back funds to call money and reverse repo markets and these funds might see redemptions.