HDFC Liquid Fund reviewed: Is the biggest liquid fund also the best?HDFC Liquid Fund ever since its launch 18 years back has consistently gained investors’ confidence and today is the biggest scheme in its category. The fund, which generated a 7.1% return in last 12 months, manages an asset base of over Rs 71,000 crore. That is easily Rs 10,000 crore more than its closest competitors – the 11-year old SBI Liquid Fund, and 14-year old Aditya Birla Sun Life Liquid Fund.

Liquid funds are preferred by individuals and institutions. Designed to be a steward of your idle money, liquid funds over the years have delivered more than the savings bank account. We review HDFC Liquid Fund.

Managed by Anupam Joshi, HDFC Liquid Fund’s recent promotions indicate that the fund-house wants to focus on its return generation track-record. While we don’t have a key to the future, we would like to look at the history to understand a lot more.

Liquid funds, as you know, are open-ended schemes that invest in debt and money market instruments with a maximum maturity of up to 91 days. These are typically used for keeping money that you won’t use in the next 1-6 months. Liquid funds are often marketed as alternatives to bank FDs or bank savings accounts. While banks give a guarantee of principal and interest protection, liquid funds aim to give higher tax-adjusted returns.

We have reviewed the HDFC Liquid Fund on the following parameters:

1. Safety – RupeeIQ believes that liquid funds should prioritise safety over returns. How do we assess safety? It can really be a subjective exercise. We think that many liquid funds, while advertising their safety, often end up investing money in not-so-safe debt securities.

The recent IL&FS default scenario showed everybody in very clear terms which debt funds invested in that group, and as a result, exposed investors to volatility. HDFC Liquid Fund did not have any investments in IL&FS group debt securities. But, some liquid schemes like LIC MF Liquid Fund, Principal Cash Management Fund, Union Liquid Fund, Mirae Asset Cash Management, and HSBC Cash Fund had exposure and have justified the same.

Earlier too, mutual funds have lost investor money in entities like Amtek Auto and Jindal Steel & Power Ltd (JSPL). So, the fact that HDFC Liquid Fund did not take any exposure, shows that its institutional memory was better than many mid and small-sized funds.

Liquid fund managers often hold exposure to corporate instruments. They are confident about the quality of such corporate debt instruments. But, as we have seen, corporate debt securities can be a source of big trouble. Even rating agencies quickly change their ratings on such corporate debt.

On a category basis, corporate debt instruments usually form 60-70% of liquid fund assets. This corporate debt is usually in the form of commercial papers. Liquid fund managers in a race to get a higher yield for investors often invest in such securities. Unless and until anything is wrong, such investing activity is always under the radar.

The fact most liquid funds, give or take a few, will always try to chase returns while maintaining safety. So, in short, they will take a small risk to get that extra return advantage. But what you don’t want them to take is too big a risk!

2. Volatility – It is easy to find out about a fund’s volatility. Equity funds can be highly volatile due to the stock market. Should liquid funds be volatile? Investors don’t think so. Liquid funds are for parking idle money and so its volatility should be minimum.

There is a metric which captures volatility. When seen in context with other funds of the same size, the standard deviation can give a good picture of a fund’s volatility. Do remember higher the Standard Deviation of a mutual fund, higher is its Volatility.

We have looked at Standard Deviation of HDFC Liquid Fund and its like-sized peers like SBI Liquid Fund (erstwhile SBI Premier Liquid Inst), Aditya Birla Sun Life Liquid Fund (erstwhile Aditya Birla Sun Life Cash Plus), and ICICI Prudential Liquid Fund (erstwhile ICICI Prudential Liquid). All these funds have above Rs 50,000 crore assets. We have also included Reliance Liquid Fund, which has about Rs 46,000 crore in assets.

Interestingly, all these schemes including HDFC Liquid Fund have the same Standard Deviation score – 0.21. So, among the peer group, HDFC Liquid Fund is as volatile as its closest competitors. There are of course liquid funds with lower standard deviation, but they are not even half of HDFC Liquid Fund’s size.

3. Risk-adjusted return – High return churned up by a liquid fund is often thought of as ‘better performance’. While this may be true in some cases, the real picture of a portfolio’s performance can be measured when the returns it generates are assessed with respect to the risk it assumes. To understand this, we use the Sharpe Ratio. The Sharpe Ratio assesses the returns generated by an MF portfolio against per unit of risk undertaken. A higher Sharpe Ratio represents a higher return generated per unit of risk.

We again use the same funds to compare the Sharpe Ratio data. So, we have looked at Standard Deviation of HDFC Liquid Fund and its like-sized peers like SBI Liquid Fund (erstwhile SBI Premier Liquid Inst), Aditya Birla Sun Life Liquid Fund (erstwhile Aditya Birla Sun Life Cash Plus), and ICICI Prudential Liquid Fund (erstwhile ICICI Prudential Liquid).

Here, we found that HDFC Liquid Fund’s Sharpe Ratio of 2.5 is lower than most of its peer schemes – SBI Liquid Fund (2.62), Aditya Birla Sun Life Liquid Fund (3.15) and ICICI Prudential Liquid Fund (3.02). Let us put this information in context. In the last one year, HDFC Liquid Fund has given 7.1% return compared to its peers delivering 7.20%-7.7.31% returns. So, we can conclude that this indicates HDFC Liquid Fund’s peers managed a better historical risk-adjusted performance. As we are often reminded, this is not a predictor of future results.

Of course, there are many small liquid funds that have much higher Sharpe Ratio but it is not best to compare them with HDFC Liquid Fund, which manages over Rs 71,000 crore of investors’ money.

4. Consistency – Liquid fund investors, like any other stakeholder, are concerned about fund return consistency. It is one thing to show that a fund gave 7% in last one year, but has it given the same in all years? This question can be partially answered by the use of rolling return. Rolling return provides a more accurate and in-depth picture of a fund’s performance as the return is calculated every day for the period under observation, rather than being dependant on any specific time frame (like last one year or 6 months).

The average of the rolling returns sometimes gives a better representation of the fund’s performance compared to the point to point returns, since it covers different market situations over the years. So, let us look at the below graph to understand how HDFC Liquid Fund’s 3-month rolling returns are over the last 5 years.


As you can see, HDFC Liquid Fund’s average 3-month rolling return at 1.94% is the second lowest in peer category (SBI Liquid Fund – 1.93%). But the difference is not much between others and the HDFC scheme. The picture does not change much if we look at the average 1-month rolling return, 1-year rolling return or 3-year rolling return. There is not much to worry here. As all of them seem pretty consistent.

5. Portfolio – Any review of a fund would be incomplete without a glance of its current portfolio holdings. HDFC Liquid Fund’s top holdings are in treasury bills, A1+ rated NABARD, REC, PNB, Tata Sons and LIC Housing issued commercial papers. These are good quality debt instruments belonging to best private firms and or government-owned companies. So, the portfolio appears to be good.

The average maturity of the fund portfolio is 0.08 years, which is in-line with its peers like from SBI and Aditya Birla Sun Life. ICICI Prudential Liquid Fund’s average maturity is slightly higher at 0.09 years while Reliance Liquid Fund sports 0.10 years. While the differences are minor, the thumb rule is longer the average maturity, the higher the risk associated with a debt/bond fund.

RupeeIQ take – HDFC Liquid Fund is the biggest fund in its category. So, it is clear that investors have many reasons to like it. In recent days, HDFC Liquid Fund has received a lot of inflows post the IL&FS fiasco. The fund’s absence from IL&FS ‘hit-list’ is a big positive and is a reflection of its credit selection. In terms of volatility, the scheme does as well as peers, even though it is much larger than all its rivals. We believe the fund can generate more returns given the kind of risk undertaken and this will be a key monitorable going forward. The fund also seems to be fairly consistent in generating good returns, even though it is a Goliath. All in all, HDFC Liquid Fund shows a lot of promise and clearly has a lot of potential given its track record of mitigating risks.

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on