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December 13, 1999
NEWS
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Short-term InvestingDhirendra Kumar
You've mastered the art of investing for your retirement and for your child's education. But you're less clear about how to invest the money for that bigger house you'll need before long. Or for establishing the badly needed cash cushion you might need anytime. Most people park money they'll need soon in a bank account, but they could do better by taking a bit more risk. For the past three months ending November 30, 1999, the average intermediate-term bond fund gave 12.88% annualised return, the average short-term bond fund gave an annualised return of 9.64%, and the average gilt fund gave an annualised 9.8%, versus 5.5% for a three-month deposit with State Bank of India. That may not seem like a lot, but compounded over time it could mean the difference between flying to your holiday destination and a long rail journey. Consider these places to stash your cash. Intermediate Term Bond Funds These funds mainly invest in corporate and sovereign debt with maturity ranging from one to five years. These funds give steady returns but can be volatile with changing interest rates. You can also lose some capital in these funds, if interest rates rise. Most of these funds charge a redemption fee ranging from 0.5 to 1 per cent, for redemption within six months. If your financial need is at least six months away then these funds are ideally suited for you. Besides, these funds are very effective short-term parking for building an equity position in a fund. For instance, if you get a windfall of Rs 100,000 as arrears of pay revision which you want to stash as a long-term saving in an equity fund. But investing a lakh at one go in an equity fund can give you some depressing and nasty surprises. Here, an intermediate-term bond fund can make your life easier. After choosing the equity fund you want to invest in, invest in the bond fund of the same fund family with an instruction to redeem a specific amount worth of units every month for investment in the equity fund. By choosing this you insulate yourself from the possibility of getting bruised by entering the fund in an overheated market. This also enables you to make the law of averages work in your favour, while all your money is working for you all the time. A medium-term debt fund could be a very effective medium to systematically channelise your windfall into equities. Short-term Bond Funds These funds invest mainly in treasuries and corporate bonds. They limit risk by hewing to the short-end of the yield curve. With an average duration of just six months, they are badly hurt when interest rates rise. If you don't want to put your principal at risk, but would like to get a little more return, short-term bond funds are a good first step away from bank deposits. But be wary of some funds, which will dip into lower-quality bonds for their higher yields. Such funds look safer than they are, because bond defaults have been few and far between in recent years. Gilt Funds A new class of debt funds has emerged over the past one year, which invest only in government securities. These funds invest in wide-ranging government debt of varying maturity. These funds are almost fully insulated from credit risk, but based on the maturity profile can also be volatile because of changing interest rates. Be wary of gilt funds with long maturity as they will be more sensitive to interest-rate shifts than short-term debt funds. And don't assume that these are risk-free funds. These funds are only protected from defaults, but can be vulnerable to rate changes.
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