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MONEY MINDER'S MAILBAG By Larissa Fernand Dear Money Minder, With virtually every avenue of investment for the retail investor shutting down, I sense that there is money to be made only in the money markets. Isn't it a pity that a small investor, like me, can't have a go at it? A Reader Dear Reader, technically, you can. Even individual investors can buy and sell instruments in the money markets. But the entry-barriers are high, with these instruments selling for at least Rs 10 lakh each. Moreover, the money markets operate on only (very) high volumes. Unless you are willing to trade in crores of rupees, liquidity could be a problem. Besides, you could face some difficulty in transferring such securities. There are two alternatives. You could gain entry into the money markets through an intermediary. The ICICI Bank, for one, offers such instruments to the retail investor, but the entry-level is Rs 25 lakh. Which leaves you with your other option: invest in the money markets through a Money Market Mutual Fund (MMMF). These funds invest only in Treasury Bills, government securities, Certificates of Deposit, the Commercial Papers (CP) of rated companies, and the call money market. You can buy a unit for as little as Rs 5,000. Dear Money Minder, Your recommendation that I invest in a mutual fund surprises me. Given their dismal performance so far, why should I even think about them? A Reader Dear Reader, I spoke only about the MMMFs to you. That's because their objectives differ radically from those of the income and growth funds, which focus either on the debt or the equity markets. The former invest only in instruments with maturities of less than one year, and are targeted at investors willing to deploy funds in the short run. As for performance, the MMMFs have rewarded their investors handsomely in recent times. For instance, the annualised yield of the Kothari-Pioneer's Money Market Account (KPMMA) for the 30-day period ended January 21, 1998, was 12.02 per cent. For the 30-day period ended February 13, 1998, the yield was 30.24 per cent. Dear Money Minder, Well, since the action has shifted to the money markets, it is natural for the MMMFs to perform better. But why is it that those markets have become so overactive? A Reader Dear Reader, In January, 1998, the Reserve Bank of India (RBI) raised the bank rate from 9 to 11 per cent, and the Cash Reserve Ratio (CRR) from 10 to 10.50 per cent. This sucked the liquidity out of the markets. So, the cost of borrowing increased, and the call money rates rocketed. And the mutual funds, which were able to lend at rates of 90 per cent in that market, made a killing. But, on an average, the returns from the MMMFs range between 10 and 12 per cent per annum. Dear Money Minder, That seems to imply that these money market funds, by their very nature, are volatile. Does that make investing in them more risky? A Reader Dear Reader, you are right about the volatility of the MMMFs. While the call rates may be 10 per cent today, they could go up to 90, or even 100, per cent tomorrow. Besides, being interest rate-sensitive, the MMMFs' Net Asset Values (NAVs) could decline during periods of rising interest rates. But the risk of capital loss is virtually non-existent. These instruments are either backed by sovereign guarantees, or, in the case of CPs, rated P, P-1, or P-1+ (indicating High Safety). Actually, being interest-rate sensitive, it is the timing that will determine your returns. Dear Money Minder, Should I, therefore, enter a money market mutual fund when interest rates are high? A Reader Dear Reader, that's right. There are three MMMFs: the idbi's i-nit '97, the UTI MMF, and KPMMA. But you could also buy into an income fund--like the JM Debt Scheme or the Birla Cash Plus Scheme--where the amount is predominantly invested in money market instruments. One reason why these funds are not structured as money market funds is that besides the money market instruments, they also invest in corporate debt. That way, they are able to provide better liquidity to the investor. Besides, they then do not have to worry about the 30-day lock-in period that MMMFs impose on investors. They prefer being sold as open-end, short-term, debt funds, opting for instruments with a maturity of less than one year. As interest rates rise, the value of the securities decreases. So, the best time to enter a MMMF is when interest rates are high. Incidentally, March is the ideal month to enter such a fund since tax-collections are at their peak, and the system is less liquid. Once the RBI starts easing its restrictions, call rates are bound to fall. Dear Money Minder, You keep talking about safety. But what about the returns? A Reader If you opt for a MMMF, you will have to deposit your money in it for a minimum period of 30 days. While this lock-in may irritate you, consider a fixed deposit with a bank. If you withdraw the deposit in the first 30 days, you get no interest at all. In the case of a MMMF, after 30 days, you can exit whenever you want at the NAV price, and get your money back in a day. True, on a one-year fixed deposit with a bank, you earn interest at, say, 11 per cent per annum. But if a fund does well, there is no reason why you shouldn't get returns higher than this. Of course, you can get an overdraft against your fixed deposit. But is that reason enough for you to shun a MMMF? |
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