I got this investor query today.
I see that the Liquid Funds were giving (~4% on a yearly basis) since we moved our earlier debts funds to these Liquid Funds this year when the franklin issue surfaced. Would want to discuss if we have an alternative to improve the returns and still retain the safety net.
Let’s get some perspective. The investor is not comfortable at all with risk and hence, the investment moved to safe (sovereign oriented with no default risk) liquid funds. Also, this was the investment portion beyond the Bank FDs. Both of these are meant to serve emergency needs.
Safety comes at a cost and in this case it was the lower returns compared to other liquid funds and debt funds.
Now, who doesn’t want to be better off? The investor here wants to get better returns too.
The question is can it happen without compromising the safety.
Most likely not!
Don’t try to chase a higher return.
Understand that market interest rates have moved down significantly and hence our expectation of returns needs to move down too.
If you look at the Yield to Maturity numbers of various debt portfolios, you will see that returns are hovering around 5%. Here’s the one on corporate bond funds
Liquid funds at 4% with a sovereign rated portfolio is a neat number.
If you do try to increase your return, you will have to start moving towards increasing maturity or lower credit profile and that while can deliver the goods, also has the potential to backfire.
Coming back, emergency funds should be kept as safe as possible spread in a few options.
Keep your return expectations lower for debt funds and generally from fixed income.
Your plan should not be dependent upon higher returns with extra risk, against your own profile. That never ends well.
Somewhere, it doesn’t feel good to see your fund at 1 or 2 stars rated by organisations giving a very high weightage to past returns. Remember, star ratings ignore a lot of other facts. Don’t let them sway you.