The first cash fund, Birla Cash Plus was launched in June 1997. These short-term debt funds being relatively new have yet to gain wider acceptance as a mainstream investment alternative. And they are really not mainstream investment. However, the benefits are clear - liquidity close to that of a savings/current account, ability to earn more with minimal risk given their lowest interest rate sensitivity as compared to medium or long-term bond funds. So, these tangible benefits, you should consider replacing cash with these funds in your portfolio.

The short-term debt funds primarily invest in money market instruments - commercial papers (CPs), certificate of deposits (CDs), treasury bills, call money market and also high quality corporate debt and gilt's with ultra-short maturity. The short-maturity profile of the portfolio reduces the interest rate sensitivity and provides high liquidity to the fund.

Besides, the investment ambit of these funds helps retains a high credit quality.

To participate in these funds' portfolio, the minimum investment ranges from a low of Rs 10,000 to Rs 1 lakh and provide the option of regular periodic investment with a systematic investment plan. Few of these funds provide greater ease of withdrawal by providing cheque writing facility for 95 per cent of the initial investment besides a systematic withdrawal facility.

Following are my top picks among short-term bond funds primarily based on their performance in one year and recent months as well, as on June 29, 2000.

Templeton India Liquid Fund
Templeton India Liquid Fund (TILF) was launched in June '98 and has yielded 9.87 per cent since go. Since April 2000, the fund has paid weekly dividends in its dividend option. The fund has largely been in call money. Though the exposure to call money boosts the NAV during sudden tightening in the money market as call rates shoot up, it deprives the fund of the higher returns on the short-term debt instruments.

The large cash position also offers the fund an opportunity to selectively participate in short-term rally in bond prices. And the fund successfully capitalised an opportunity recently during December '99 and February 2000. During this period, the fund increased its investments in short-term debentures from 12 per cent to 30 per cent. The fund despite the constraints has posted good performance figures. Currently, money at call account for 79 per cent, commercial paper and short-term debentures 5 per cent each, PSU bonds 7 per cent and gilts 4 per cent.

Prudential ICICI Liquid Plan
Prudential ICICI Liquid Plan (PILP) normally invests 80 per cent in money market securities and the rest in debt instruments. The fund also started paying weekly dividends in its dividend option since April 2000. The fund offers cheque writing facility (only for withdrawal for self and not for third party issuing) to its investors after five business days of investment.

The fund, launched at the same time as TILF, has since launch given an annualised return of 9.6 per cent. The fund has been a steady performer with a portfolio diversified across instruments and a strictly held less than one-year portfolio tenure, but within that tenure the fund has actively moved in and out of maturity profiles.

The fund maintaining a 35 per cent-45 per cent allocation to call money market has since August '99 reduced it to levels of 25 per cent and instead assumed exposure to gilts. Post August '99, the fund also shifted its preference from P1+ papers to commercial papers and AAA rated papers.

As on May 31, 2000, the fund has a maturity profile of 2.76 months with call money accounting for 22 per cent, commercial papers, the highest at 52 per cent and AAA rated papers 25 per cent. The portfolio tilt towards short tenure debt instruments would yield better returns but make the fund have a dash of interest rate risk.

Dundee Liquidity Fund
Dundee Liquidity Fund (DLF), launched in February '99, has since launch given an annualised return of 11.95 per cent. The fund also pays weekly dividends on its dividend option. The returns of DLF are among the highest of the category primarily because of its more than one year maturity profile which coupled with the falling interest rates since July '99 has seen the fund post, on an average, a return of more than 40 basis points than its peers.

The fund in the month of February took a major leap into the medium-term tenure increasing its maturity profile to more than two years. Besides, the 37 per cent allocation to Gilts and 19 per cent in AAA saw the fund gain 3 per cent (peers gained around 1.5 per cent) in the two months ending February 2000, when bond markets rallied on the rate cuts in Savings Instruments.

Currently, fund has a tenure of marginally less than two years with an asset allocation between gilts (28 per cent), AAA paper (20 per cent), P1+ and commercial papers (11 per cent) and cash (41 per cent). The return looks tempting but the fund can prove to be an unacceptable bumpy ride.

-- Value Rsearch