Duration play does the trick

DBS Chola Freedom Income - STF is an income scheme with an investment objective of generating regular and stable income. It proposes to invest at least 80 per cent of the assets in fixed income securities and the balance is in money market instruments of high quality.

The scheme has been re-positioned as a liquid plus scheme, like most other debt schemes from different AMCs have done in the last one year. This is due to the differential tax treatment enjoyed by money market mutual fund schemes and other debt-oriented income products. In comparison to liquid funds, liquid plus funds have a higher average maturity profile and assume slightly more interest rate risk than a normal liquid product.

A short-term investor tries to invest in a product which ensures high liquidity while safeguarding capital. Liquid plus funds, in addition to the high liquidity, provide an option to optimise returns as well. They invest around 30-35 per cent of the total net assets in longer maturity papers which offer better yield without assuming too much risk.

The liquid plus category has gained in popularity with investors - these account for almost 13 per cent of the total industry assets.

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DBS Chola FI - STF has a corpus size of Rs 890.3 crore as on December 07. It has seen some decline compared to the previous quarter, when it had close to Rs 1220 crore of assets under management. The liquidity crunch witnessed in the system due to advance tax outflows and possible RBI intervention to absorb liquidity could be the reason of the corpus shrinkage in the last quarter.

The scheme currently has invested heavily (55.49 per cent of total net assets) in certificates of deposit issued by various banks. The fund manager had more than 80 per cent of the net assets in bank CDs in the last quarter. The drop in exposure to such instruments is possibly owing to redemption pressures. The scheme is also maintaining higher cash levels this month, at 14.62 per cent.

These factors have meant that the portfolio average maturity has come down to 153 days. The fund manager also invested in floating rate debentures (13.15 per cent). The scheme has put up a decent performance since inception. It has an expense ratio of 0.55 per cent, which is competitive.