The options we have for cash component is Liquid funds, money market funds, Gilt funds, Government Securities and SGB.
- Liquid funds returns are on a lower side.
- Gilt funds are volatile
- SGB funds do not have enough liquidity if I have to buy in secondary market. So I will lose out on a small part because of bid ask Spread. I do not like to buy it directly at the time of issue because I have to wait for 2 months to pledge them. So there is an opportunity foregone. Also if I want to sell these units to cover mark to market losses, then again there is liquidity problem and it wont be trading at its fair value.
- Liquidity problem in government bonds.
So for the total cash component this is how I have taken exposure.
- SGB - 20% (I buy from second market and will hold till muturity.
- Gilt funds -20% (Over a period of 5 years, I am of the opinion, it will beat money market funds. Wont redeem them for long.)
- Money Market Funds - 60% (Steady return usually. So can redeem when I have to cover M2M losses. )
Further I spread it in 2 different AMCs because I want to take advantage of LTCG. For all adjustments I use one of them.
Whatever I have mentioned above, is solely based on my experience in FNO segment in 2 years. Please feel free to share your views.