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Investors who have a surplus parked in their savings-bank accounts can consider investing a portion of these funds in Canara Robeco Floating Rate Fund (CanRobeco Floater). This fund invests in short-term debt (maturity of less than a year) and money-market instruments such as commercial papers and certificates of deposit.
There are several reasons for investing in ultra-short-term funds. One, in spite of short-term rates declining, funds may continue to offer better returns than majority of savings-bank accounts which offer up to 6 per cent. Two, a sharp decline in interest rates is unlikely in the near term due to the sticky nature of inflation. For the Reserve Bank of India to cut rates, inflation has to show sustained signs of moderation which appears unlikely over the next couple of quarters. Even if the rates are cut, the savings-bank rates may decline too.
Three, if liquidity in the system continues to be tight during the second half of the year, the market rates may actually go up as evidenced over the last few years due to higher credit demand from companies. Over the last three years, the yields on three-month commercial papers have risen by anywhere between 1.5 per cent and 2.1 per cent from September to March. This will improve returns from funds such as CanRobeco Floater, which are focused on money markets.
CanRobeco Floater has been a consistent performer in the ultra-short-term-fund category. Over six-month, one-year and three-year periods, the fund has returned an annualised 9.8 per cent, 10.1 per cent and 8 per cent respectively. Its benchmark CRISIL Liquid Fund Index returned 8 per cent, 8.65 per cent and 6.9 per cent during the same periods. Over the last four years, the fund has outperformed its benchmark 93 per cent of the time on a one-year rolling-return basis.
SUITABILITY
CanRobeco Floater carries higher risk than savings-bank deposits as the latter are insured upto Rs 1 lakh. But the risk of default on the portfolio is minimal given that the investments are in top-rated money-market instruments. The fund’s return over a one-year period has never fallen below 4.6 per cent in the last five years. The fund carries exit load of 0.25 per cent if sold before 15 days of investment. Investors should also note that the redemption is not immediate as in case of a bank account.
Investors with a holding period of less than a year in higher tax brackets should buy the dividend reinvestment option rather than the growth option. Where held for less than one year, returns from this fund in the growth option will attract short-term capital gains tax. They will be taxed at the investor’s marginal rate of tax. But the dividend reinvestment option will be taxed at 13.5 per cent at the fund level by way of dividend distribution tax.
PORTFOLIO
CanRobeco Floater has maintained an average maturity of around two months for the last two years. The yield to maturity of the fund (annualised) is currently at 8.9 per cent. Around 88 per cent of the funds are invested in certificates of deposit and commercial papers, with rest invested in CBLO and call markets. Currently, the average yields on three-month certificates of deposit and three-month commercial paper works out to 8.28 per cent and 8.6 per cent respectively. The call-money and CBLO rates are hovering around 8 per cent.
Investors who have a surplus parked in their savings-bank accounts can consider investing a portion of these funds in Canara Robeco Floating Rate Fund (CanRobeco Floater). This fund invests in short-term debt (maturity of less than a year) and money-market instruments such as commercial papers and certificates of deposit.
There are several reasons for investing in ultra-short-term funds. One, in spite of short-term rates declining, funds may continue to offer better returns than majority of savings-bank accounts which offer up to 6 per cent. Two, a sharp decline in interest rates is unlikely in the near term due to the sticky nature of inflation. For the Reserve Bank of India to cut rates, inflation has to show sustained signs of moderation which appears unlikely over the next couple of quarters. Even if the rates are cut, the savings-bank rates may decline too.
Three, if liquidity in the system continues to be tight during the second half of the year, the market rates may actually go up as evidenced over the last few years due to higher credit demand from companies. Over the last three years, the yields on three-month commercial papers have risen by anywhere between 1.5 per cent and 2.1 per cent from September to March. This will improve returns from funds such as CanRobeco Floater, which are focused on money markets.
CanRobeco Floater has been a consistent performer in the ultra-short-term-fund category. Over six-month, one-year and three-year periods, the fund has returned an annualised 9.8 per cent, 10.1 per cent and 8 per cent respectively. Its benchmark CRISIL Liquid Fund Index returned 8 per cent, 8.65 per cent and 6.9 per cent during the same periods. Over the last four years, the fund has outperformed its benchmark 93 per cent of the time on a one-year rolling-return basis.
SUITABILITY
CanRobeco Floater carries higher risk than savings-bank deposits as the latter are insured upto Rs 1 lakh. But the risk of default on the portfolio is minimal given that the investments are in top-rated money-market instruments. The fund’s return over a one-year period has never fallen below 4.6 per cent in the last five years. The fund carries exit load of 0.25 per cent if sold before 15 days of investment. Investors should also note that the redemption is not immediate as in case of a bank account.
Investors with a holding period of less than a year in higher tax brackets should buy the dividend reinvestment option rather than the growth option. Where held for less than one year, returns from this fund in the growth option will attract short-term capital gains tax. They will be taxed at the investor’s marginal rate of tax. But the dividend reinvestment option will be taxed at 13.5 per cent at the fund level by way of dividend distribution tax.
PORTFOLIO
CanRobeco Floater has maintained an average maturity of around two months for the last two years. The yield to maturity of the fund (annualised) is currently at 8.9 per cent. Around 88 per cent of the funds are invested in certificates of deposit and commercial papers, with rest invested in CBLO and call markets. Currently, the average yields on three-month certificates of deposit and three-month commercial paper works out to 8.28 per cent and 8.6 per cent respectively. The call-money and CBLO rates are hovering around 8 per cent.
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