MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

Where should I invest my surplus money for short-term needs?

 - Adarsh Kumar

Short-term investments are the most liquid assets available in the market, which are specifically designed to provide safe and temporary options for the short-term needs of investors. Investors can park their surplus in fixed income instruments. Mutual funds offer short-term funds, ultra-short- term funds or liquid funds. Besides this, investors can take the route of fixed deposits or savings deposits. Some banks such as IDFC First Bank offer 5 per cent per annum interest on savings, one of the highest rates offered, whereas State Bank of India offers 4.4 per cent interest rate if the corpus or surplus of the investor is invested for 180 days up to one year.

✓ Short-Term Funds: These funds invest in instruments such as debt or money market instruments in such a way that the duration is between 1-3 years.
✓ Ultra-Short-Term Funds: These types of funds invest in instruments such as debt or money market instruments in such a way that the duration is between 3-6 months.
✓ Low Duration Funds: Low duration funds invest in instruments in such a way that the duration is between 6-12 months.

There are various types of funds available in the market and investors should choose according to their personal needs and goals. Before investing in any fund investors should go through the duration of a particular fund and where their capital would be invested. The duration should ideally match your investment horizon.

What is standard deviation and how can this be interpreted while investing in mutual funds?

-Janhavi Mehta 

One of the ways to measure risk is using a statistical tool called ‘standard deviation’. The principle guiding it is that higher the standard deviation, higher the risk and hence higher the variation and volatility. Standard deviation becomes an important constraint while investing in mutual funds as it depicts how much the fund is deviating from its average return. Standard deviation differs across categories of funds. Generally, large cap funds have lower standard deviation as compared to mid-cap and small-cap funds. Small-cap funds have higher standard deviation as they are prone to higher volatility. Similarly, equity funds have higher standard deviation as compared to debt funds as equity funds are very volatile in nature.

The formula of standard deviation is as follows:

For instance, say a fund has a standard deviation of 5 per cent and an average return of 15 per cent per year. During most times, the fund’s future returns will range between 10-20 per cent or its 15 per cent average plus or minus its 5 per cent standard deviation. The returns will deviate by 5 per cent below or above the average return of the fund. The following table depicts the comparison of standard deviation between large-cap funds, small-cap funds and liquid funds.

From the table above we can evaluate the risk based on standard deviation data. Small- cap funds have highest standard deviation i.e. higher risk, large-cap funds have moderate standard deviation as compared to small-cap funds i.e. moderate risk and liquid funds have the least standard deviation i.e. lower risk.