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I am looking to park some surplus funds in low risk mutual funds rather than FD's. I have shortlisted the categories Equity Arbitrage and Liquid Funds. Would appreciate your comments on the following i.e.
a) Choice of Equity Arbitrage and Liquid Funds for Low risk investment as compared to FD's.
b) Kotak as an option for Equity Arbitrage.
c) Unable to make a choice for liquid fund. Higher rated funds are giving low returns and vice versa as per moneycontrol.

You should also look at Overnight funds. The returns will be lower than liquid funds, but the risk is also lower.

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In general, risk and returns have positive correlation. Higher returns implies Higher risk. Better stay away from high returns liquid funds, especially if the AUM is low; they could have made risky investments in pursuit of higher returns. Better to choose a liquid fund from a big MF house with high AUM.

The advantage of arbitrage funds is that it offers liquid fund like returns but is treated as an equity fund for taxation purposes. If you are losing a significant chunk of your debt fund returns to tax, then you can shift some capital to arbitrage funds.

However, returns earned from arbitrage funds is not directly linked to short term interest rates. In a strong bear market, the net returns from arbitrage strategy could be 2 to 3%. Because futures prices of stocks will not be significantly higher than spot prices in such markets. But then, the fund manager has the option to invest funds in liquid funds if he does not see arbitrage opportunities.

Clearly understand how arbitrage funds work before investing in such funds. It is "risk free" by design, but it is better to understand how it generates returns before investing.

What do you think of 'equity savings funds'? Almost all fund houses now offer these and where they stand out in comparison to arbitrage funds is that there is a portion (could be as high as 40pc) of unhedged equity. In a bull market these funds could generate decent tax efficient returns provided the interest rates are also stable.

https://www.fundsindia.com/blog/mf-r...ngs-funds/7598

Very clever! I was not aware of this category of funds.

Problem with balanced funds is that equity allocation at 65% is still too high. In 2008-09, balanced funds lost 40 to 45%. Lowering equity allocation below 65% will result in loss to investors because of change in tax status.

So this 'equity savings fund' category allows fund manager to aggressively get out of stocks if he feels there is uncertainty in the markets.

Wondering if equity funds really have a tax advantage over debt funds after the introduction of LTCG tax on equity. If held for more than three years debt funds get indexation benefit and the real tax rate has actually turned out be less than equity in my case at-least.

On a different note i got email from Franklin Tempelton that they are implementing "segregation" for there Ultra Short Term Bond Fund where i am an investor. On the surface of it looks like a side pocketing implementation. The timing of this make me wonder if they are smelling a default from Vodafone_Idea where this fund has significant exposure.

I have parked some recent gains into corporate deposits. They are apparently giving 9% plus returns. Let us see how it goes.

I received the mail too. Have invested in their Ultra Short Term Fund. I'm in a dilemma whether to redeem and reinvest elsewhere or stay invested :Frustrati

Yes, I also got this mail. Apart from Ultra Short Term bond fund, I also have investment in FT Low Duration which has around 5% exposure to Vodafone.

But i feel timing may just be a coincidence. They may be implementing side-pocketing for any future defaults/downgrades, since I think SEBI notified the rules regarding side-pocketing recently. FT has listed all their funds for this change.

Franklin Income opps/ Short term income/ low duration/ dynamic accrual fund.
These have significant exposure to Vodafone papers apart from Ultra short. Looking from a macro point of view, then Franklin is the one with the highest exposure to vodafone papers followed by Aditya birla & UTI in the market. Recently UTI debt schemes have gone into red after the default/ downgrade of Altico capital. SOmeone I know who had a big investment has lost a significant amount over it.

My investment philosophy w.r.t. debt/ liquid funds is very simple- when in doubt, stay out. I can take risks with my equity investments, but if I have parked my funds in a debt scheme, it means I am not willing to take additional risks on that. You may consider switching to liquid funds for a while. Franklin has one too.

Regards.

Quick question to all: what to do with the SIPs now? At> 40K and Nifty close to 12000 I have weekly SIPs which I am buying very very high( large caps, banking sector funds) ! Should I stop and divert to liquid or ultra short term debt funds? I am a "long term" person, have persisted, but this is one market condition and sentiment, I am not able to gauge, make sense of or figure out, with my common sense. Please advise. My SIP portfolio is 50 equity, 20 hybrid, 30 debt!

Hmm. True that.

1) Stop SIPs in hybrid funds since you already have a mix of debt and equity funds
2) Sell all hybrid funds and move proceedings to debt funds
3) Setup a higher SIP amount in debt funds, so that your investment mix is 50% equity and 50% debt.

You are set for life. Don't bother about Nifty "levels".

By long term if you mean anything more than seven years, then current market levels matter little. This is true for pure equity funds. Cannot comment on sectoral funds, I avoid them as a good broad based fund is proportionately represented. I don't think the Indian market is mature/deep enough for retail investors to make sectoral bets.

Thanks for the suggestion Saket. Will look into it:)

This is a good point. Many investors seem to have multiple expectations from debt funds. If you are using them for stability in your portfolio, and may be tax efficiency, then stick to the funds with the lowest credit risk and interest rate risks. Unfortunately there is no category that minimizes both, but some liquid funds have explicit statements regarding the credit risk that they take. Interest rate risk is anyway low for liquid funds. As for names, you can look at the scheme disclosures of Parag Parikh Liquid and Quantum liquid.


If you are somehow looking for FD+x% return in debt funds, then you have to tolerate some level of credit risk. Franklin UST is definitely one such fund, and as people realize now, there is some credit risk.


As for opinions on what to do with Franklin UST, if you want a published opinion (with some errors), see here - https://twitter.com/SriNiveshIndia/s...51338509438976 (disclaimer: it is my view) and here - https://freefincal.com/vodafone-idea-downgrade/