Expense ratio lower in direct plans as no commissions have to be paid to distributors

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SummaryIn the current market scenario, is it advisable to invest in short-term liquid funds with a horizon of 180 days to a year?

In the current market scenario, is it advisable to invest in short-term liquid funds with a horizon of 180 days to a year?

— Utpal Chakraborty

Liquid funds did deliver marginal negative returns on certain days on account of the extreme volatility in fixed-income markets. However, they have still managed to recover and post decent returns. Monthly returns of liquid funds were, on an average, 0.6% in June, followed by 0.5% in July. It recovered to 0.9% (on an average) in August, bringing YTD return in 2013 to a decent 5.7%. Therefore, YTD returns of liquid funds stand significantly better than duration products, which have delivered negative returns lately due to a sharp spike in bond yields. Also, liquid funds are likely to benefit from the higher short-term rates in the near future; therefore, it is fine to consider them for parking money for the short term. If you want a slightly higher yield, you can also consider an ultra-short bond fund, which matches your investment horizon.

Redemptions are taking place in gold ETFs. Is it advisable to redeem some units as gold prices seem to have peaked?

— H Unnikrishnan

Domestic gold prices saw a significant rally recently due to the rupee fall and also the recovery in international gold prices. You can consider some profitbooking if you are sitting on significant gains and also if you have an overweight allocation to gold ETFs. However, a part of your allocation to gold ETFs can be kept as a more strategic long-term allocation, provided you want to hold it for the long term (at least five years).

In gilt funds, do I have an option to make a switch if the returns start trending down?

— Amit Datta

Yes, you can switch to another lower duration fund like a short-term fund, but do keep an eye on whether there are any exit loads that you may be incurring, especially if you are exiting in a short time-frame. Also, it is advisable not to panic and exit at this juncture, especially if you have invested into a gilt fund a few months back and are sitting on significant losses. Wait for things to stabilise in the debt markets and for a clearer picture to form on the future direction of interest rates.

Are direct plans really cost-effective? How much additional returns can I expect?

— Pramod Awasthy

Direct plans bear a lower expense ratio as they do not pay commissions

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