Are you looking for the safety of your capital as economic uncertainty grips the global markets in 2023? Yes? Then consider investing in some of the best Liquid Funds

Now many of you might be wondering, why I am suddenly talking about the safety of capital especially when the central banks across the world could be less hawkish in 2023 as compared to last year given that inflation is easing or moderating.

Well, the fact is inflation is still above the target of most central banks. If geopolitical tensions escalate, there are clashes between global economic powers; we may witness supply chain disruptions and that would once add to inflationary pressures. Central banks in such a case would do their best to tame inflation, but monetary tightening could result in stagflation in 2023 or a significant economic slowdown if not a global recession.

Europe is already grappling with its own troubles of high energy prices and rapidly deteriorating geopolitical and socio-economic situation on the back of the Russia-Ukraine war, posing a challenge to its economic conditions.

At present, although China has dismantled the COVID-19 restrictions after a long phase of strict lockdowns, causing some excitement in the global markets; China doesn’t appear to be a global growth engine anymore.

To add to the worries of global markets, risk emanates from Chinese New Year celebrations based on the lunar calendar. Various estimates suggest that ‘Chunyun‘-the spring festival travel rush in midst of the Chinese Lunar New Year celebrations where more than 2 billion people are expected to migrate –could cause a resurgence of COVID-19 infections worldwide.

As far as India is concerned, the RBI is of the view that accentuated headwinds from protracted geopolitical tensions, tightening global financial conditions and slowing external demand, may weigh down on economic growth. India, although currently the fastest-growing Emerging Market and Developing Economy (EMDE), may not remain fully immune or insulated from what happens in the global economy. In consequence, this may have an impact on the earnings of companies, plus end up upsetting business confidence, the credit environment, the capex cycle, and consumer confidence.

So, it is important not to get carried away by the short-term upswings of equity markets and instead, sensibly allocate a portion of your total investment portfolio to the best Liquid Funds to preserve capital (rather than erode it) as the world goes through uncertainty in 2023.

Are you aware of legendary investor, Warren Buffet also tactically allocated to cash-and-cash equivalents to de-risk his portfolio?

Berkshire Hathaway’s Annual Report 2021 shed some light on this interesting topic.

By the end of December 2021, Berkshire Hathaway held surplus cash of US$ 144 billion. This was slightly over 41% of the value of its financial equity investments in companies where it did not have any direct control. Over 80% of its cash surplus, Berkshire parked with short-term US treasuries with a 1-year maturity.

The result? When the opportunity was ripe with the correction in the year 2022, Buffett stood to gain. His portfolio once again outstripped the S&P 500 Index in 2022.

In the past as well Buffett has sensibly allocated a portion of the portfolio to short-term US treasuries.

So, take a leaf out of Buffett’s book, and sensibly allocate a portion of your portfolio to some of the best Liquid Funds (akin to holding cash). Doing so, shall serve three main purposes:

  1. Help preserve capital
  2. Offer you liquidity to meet unforeseen situations
  3. Make the most of value-buying opportunities that the equity markets might offer you during downturns or corrections (wherein the funds could be transferred by the way of staggered lump sum switches from a Liquid Fund to a suitable equity fund, or you could enrol for the Systematic Transfer Plan).

What are Liquid Funds?

Liquid funds are open-ended debt mutual funds that primarily invest in short-term money market instruments with a maturity of upto 91 days. Liquid mutual funds invest in money market instruments such as Certificate of Deposits (CDs), Commercial Papers (CPs), Term Deposits, Call Money, Treasury Bills and so on.

But don’t live by the following myths while investing in Liquid Funds…

Myth #1: Liquid funds are risk-free — No, the fact is there is some element of risk when you invest in Liquid Funds. They are not completely risk-free. If a Liquid Fund invests in debt papers of private issuers compromising on quality to generate slightly better returns, the risk could be elevated. But, by and large, Liquid Funds are placed at the lower end of the risk-return spectrum and carry low risk.

Myth #2: NAV of a liquid fund only goes up (does not fluctuate) — No, this isn’t true. The NAV is mark-to-market, so can fluctuate for multiple reasons. But compared to some other sub-categories of debt funds and more volatile equity funds, the fluctuation in the NAV is far less. Only if the portfolio characteristics are compromised, the NAV of a Liquid Fund could fall more. The IL&FS episode of 2018 and its impact on Liquid Funds is a classic example.

Myth #3: Liquid funds are for conservative investors only — Again, not true! Liquid Funds serve different objectives. When you turn conservative as equities seem expensive, deploying money to a Liquid Fund is sensible, but when equities look attractively priced and it’s time to go aggressive, wherein you switch your money from a Liquid Fund. This way it helps both, conservative and aggressive investors enabling them to follow a flexible approach.

What are the things to keep in mind when investing in Liquid Funds?

Well, to make the best choice among a plethora of Liquid Funds, here are a few things to keep in mind:

  • Ensure the fund is investing in securities having high credit quality which are issued by reliable institutions
  • Watch out for negative observations by independent credit rating agencies
  • Make sure the fund manager has made adequate provisions to deal with unforeseen liquidity crunch and redemption pressure
  • And assess if the fund follows strong investment processes and systems

When you invest in Liquid Funds to manage your liquid cash, preferably choose the Direct Plan. Under the Direct Plan, a lower expense ratio is charged than a regular plan, which may earn you a tad extra return.

How have Liquid Funds performed?

Going by the category average returns across timeframes, Liquid Funds have underperformed Crisil Liquid Fund Index consistently but have managed to outpace Crisil 1-Year T-Bill Index. Over the last one year, the Liquid Funds category has fetched an absolute return of 4.85%, slightly superior to the nominal interest on a savings bank account.

While you may seem dismayed by the returns, as I explained to you earlier, returns should not be your priority when you invest in liquid funds but rather the preservation of capital or safety of your hard-earned money. The portfolio of a Liquid Fund should be constructed in a way that ensures the investors’ hard-earned money is prudently parked in safe and liquid instruments, whereby it can earn a slightly higher return than the interest on a savings bank account (just not extraordinary returns).

Which are the three best Liquid Funds to keep your money safe and liquid in 2023?

Going by the ability to outperform the category returns by holding a quality portfolio, the three best Liquid Funds to invest in 2023 are:

  1. Mirae Asset Cash Management Fund
  2. Quantum Liquid Fund
  3. Union Liquid Fund

Table 1: 3 Best Liquid Funds for 2023

Scheme Name Returns (Absolute%) Returns (CAGR%) Risk-Ratios
1 Month 3 Months 6 Months 1 Year 2 Years 3 Years Std. Dev. Sharpe
Mirae Asset Cash Management Fund 0.57 1.65 3.00 5.04 4.24 4.22 0.19 0.72
Quantum Liquid Fund 0.53 1.57 2.86 4.78 4.01 3.87 0.18 0.51
Union Liquid Fund 0.58 1.66 3.01 5.06 4.23 4.26 0.19 0.68
Category average of liquid funds 0.55 1.59 2.89 4.85 4.06 4.14 0.18 0.64
Crisil Liquid Fund Index 0.57 1.67 3.07 5.18 4.41 4.44 0.18 0.80
Crisil 1 Yr T-Bill Index 0.60 1.92 2.80 4.35 3.95 4.52 0.94 0.03

Performance as of 13th January 2022. Returns are Point to Point and in %, calculated using the Direct Plan-Growth optionThe risk-free rate is considered as 3% p.a.
Past performance is not an indicator of future returns.
*Please note, this table only represents the best-performing schemes based solely on past returns and is NOT recommendations as such. Speak to your investment advisor for further assistance before investing.
Disclaimer: Quantum Liquid Fund is a scheme from Quantum Mutual Fund, a group company of Quantum Information Services Pvt. Ltd. PersonalFN is not in receipt of any commission directly or indirectly for suggesting the scheme.
Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully. 

Here are some details of why these schemes are the best in the Liquid Funds category…

Best Liquid Fund for 2023 #1: Mirae Asset Cash Management Fund

Launched in January 2009, Mirae Asset Cash Management Fund aims to generate consistent returns with a high level of liquidity in a judicious portfolio mix comprising of money market and debt instruments.

The fund has maintained a quality portfolio since its inception and continues to stick to the scheme objectives by holding cash, sovereign debt, and non-sovereign debt with the highest credit quality.

Table 2: Top-10 holdings of Mirae Asset Cash Management Fund

Debt instrument % of assets
Tri-Party Repo (TREPS) 14.18
Indian Bank (31-Jan-23) 2.60
Small Industries Development Bank of India -202D (20-Mar-23) 2.58
Punjab National Bank (19-Jan-23) 1.74
Berger Paints India Ltd. -29D (27-Jan-23) 1.74
91 Days Treasury Bill – 02-Feb-2023 1.73
National Bank For Agriculture & Rural Development -76D (31-Jan-23) 1.73
91 Days Treasury Bill – 09-Feb-2023 1.73
91 Days Treasury Bill – 16-Feb-2023 1.73
Reliance Retail Ventures Ltd. -86D (15-Feb-23) 1.73

Data as of 31st December 2022
(Source: ACE MF, PersonalFN Research) 

As of 31st December 2022, Mirae Asset Cash Management Fund held 75 holdings in its portfolio, and the top 10 holdings accounted for 31.5% of the portfolio.

It held 71.65% of its assets in AAA and equivalent securities, 13.84% in G-secs, and 14.51% in cash-and-cash equivalents. Its portfolio mainly comprised Commercial Papers (CPs) which accounted for 41.07% whereas Certificate of Deposits (CDs) and corporate debt constituted 27.26% and 3.31%, respectively.

It’s noteworthy that, barring Tri-Party Repo (TREPS), no other holdings of the fund had a weightage of more than 3% in the portfolio. In other words, although the fund has a lower exposure to G-secs, it is focusing on investing in top-grade securities as well as spreading risks across issuers thereby improving the overall risk score of the portfolio.

Best Liquid Fund for 2023 #2: Quantum Liquid Fund

Launched in April 2007, Quantum Liquid Fund aims to provide optimal returns with a low level of risk while keeping the liquidity high through judicious investments in the money market and debt instruments.

Table 3: Top-10 holdings of Quantum Liquid Fund

Debt instrument % of assets
91 Days Treasury Bill – 19-Jan-2023 12.86
Tri-Party Repo (TREPS) 12.21
91 Days Treasury Bill – 05-Jan-2023 8.59
Canara Bank (05-Jan-23) 8.59
182 Days Treasury Bill – 23-Feb-23 8.52
91 Days Treasury Bill – 09-Mar-2023 8.50
Bank of Baroda (14-Feb-23) 6.82
Export-Import Bank Of India -151D (06-Jan-23) 4.29
Small Industries Development Bank of India (18-Jan-23) 4.28
91 Days Treasury Bill – 27-Jan-2023 4.28

Data as of 31st December 2022
(Source: ACE MF, PersonalFN Research) 

Historically, Quantum Liquid Fund has adopted an ultra-cautious approach for its portfolio and has never chased yields for additional returns, thereby making it truly a low-risk Liquid Fund.

As of 31st December 2022, the fund held a compact portfolio comprising 17 debt securities and cash and cash-equivalent assets. Top-10 holdings accounted for 78.94% of the fund’s portfolio.

The weightage of ‘AAA and equivalents’ are to the tune of 38.54% in the fund’s portfolio, besides its 48.74% exposure to sovereign debt, which reflects its penchant for high-credit quality. CDs, CPs, and corporate debt accounted for 19.70%, 12.82% and 6.02%, respectively, while the fund held around 12.72% in cash and- cash equivalent assets.

As of 31st December 2022, Quantum Liquid Fund’s weighted average expense ratio is 0.15%, which is lower than some of its category peers.

Best Liquid Fund for 2023 #3: Union Liquid Fund

Launched in June 2011, Union Liquid Fund aims to provide reasonable returns commensurate with lower risk and a high level of liquidity through a portfolio of money market and debt securities.

Table 4: Top-10 holdings of Union Liquid Fund

Debt instrument % of assets
Reverse Repo 8.45
Axis Finance Ltd. -88D (28-Feb-23) 4.71
Redington Ltd. -34D (17-Jan-23) 3.39
Indian Bank (31-Jan-23) 3.38
Reliance Retail Ventures Ltd. -82D (31-Jan-23) 3.38
The Ramco Cements Ltd. -60D (31-Jan-23) 3.38
Cholamandalam Investment Finance Co. Ltd. -182D (03-Feb-23) 3.38
91 Days Treasury Bill – 09-Feb-2023 3.38
Bank of Baroda (10-Feb-23) 3.38
HDFC Bank Ltd. (10-Feb-23) 3.38

Data as of 31st December 2022
(Source: ACE MF, PersonalFN Research) 

As of 31st December 2022, Union Liquid Fund held a portfolio of 44 debt securities and cash-and-cash equivalent assets. The top 10 holdings accounted for 40.2% of the portfolio.

The fund allocated 79.22% of its portfolio to AAA equivalents while sovereign debt and cash and cash equivalents constituted 12.22% and 8.56% of its portfolio respectively.

CDs and CPs had a weightage of 31.38% and 47.84% respectively with no exposure to corporate debt. Although CPs have the highest weightage in the portfolio, the fund has refrained from taking concentrated bets and has diversified across industries by picking high-quality CPs only.

The weighted average portfolio of Union Liquid Fund is 0.07% as of 31st December 2022, one of the lowest in the industry.

What are the tax implications of investing in Liquid Funds?

All debt funds, including Liquid Funds, attract Short Term Capital Gain (STCG) tax and Long Term Capital Tax, depending on the holding period.

Short-term refers to a holding period of 3 years. If you have made Short Term Capital Gains, they will be added to your income and taxed at the applicable tax-slab rate. Assuming you are in the highest tax slab, the income-tax rate applicable for this purpose will be 30%.

For capital gains made on a holding period of over 3 years, referred to as Long Term Capital Gain, the tax rate applicable will be 20% with indexation benefit.

Moreover, if you have opted for the IDCW option (erstwhile known as the dividend option), and received dividends on the Liquid Fund investments, it will be added to your Gross Total Income (GTI) — declared under ‘Income from Other Sources’ — and taxed at the applicable income tax rate.

[Read: All You Need to Know about Taxability of Mutual Funds]

With this, we conclude our discussion on the 3 best liquid funds to invest in 2023. In brief, you should focus on the safety of capital and the portfolio profile of liquid schemes, instead of considering just the absolute returns to choose the best Liquid Fund.

This article first appeared on PersonalFN here

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