Parking your short-term surpluses

The fund’s annual returns in the first two years since launch (May 1999) saw it figure among the top 10 in its category. Till 2000, everything went fine. However, in 2001, when interest rates fell on three occasions, the market shifted interest to long-tenure bonds. As a result, the short-term bond category went out of fashion and so did this fund. Nevertheless, it still managed to beat its peers.

The reason: the fund manager actively manages the portfolio—short-term corporate bonds (largely AAA), commercial paper and call money. In early 2000, when interest rates were cut, the fund moved to short-term government securities for a while. But soon it re-allocated nearly 47 per cent of its assets in call money, when rates made a U-turn in mid-2000. Again in 2001, after acquiring size, it moved from CPs to top-rated short-term bonds and debentures—a move that fetched the fund superior returns.

Quite in line with its stated investment horizon of 7-90 days, its maturity has also ranged between 1.28 months and 3.60 months. On the other hand, with stability in call and money markets in recent years, it makes fewer bets here except on extremely volatile occasions.

Overall, in the past one year, Pru-ICICI Liquid Plan with 7.12 per cent annualised return, over a 1-week rolling period, outperforms 18 members of its category. That apart, low expenses— which bests nearly 37 per cent of its peers—along with a top-quality portfolio make this fund worth a look.

The writer is an analyst with Value Research, a leading provider of mutual fund data, analysis and opinion in India.