“After two years, we are now asking fixed income investors to move money into liquid and ultra-short-term funds as banks have not matched the rate hikes,” said Anup Maheshwari, founder, Money Mantra, a mutual fund distributor.
Mutual fund investors had shunned debt funds as rising interest rates and volatility had led to poor returns in debt funds with investors earning just 2-3% in liquid funds.
However, most banks have not raised savings account rates at all, and have only marginally raised fixed deposit rates. This has made investments in these products unattractive now, point out distributors.
Balances in
savings bank earn a mere 2.7%, and those in earn 3%. Short tenure deposits of 45 days to 179 days in SBI earn 4%, while in HDFC Bank they fetch 4.5%. In comparison, an investment in a liquid fund or an ultra-short-term fund can earn between 6% and 6.5%.
Fund managers believe liquidity is likely to remain tight, which means short-term rates are likely to remain elevated in the near term.
“Cash withdrawals typically increase in the second half of the financial year. With a high trade deficit, RBI’s forex sale may also continue. Thus, liquidity conditions should tighten further in coming months; which in turn would keep short term rates elevated,” said Pankaj Pathak, fund manager (fixed income), Quantum Mutual Fund.
Financial planners suggest investors use liquid and ultra-short-term funds for balances ranging from 7 days to 6 months. Most funds accept amounts as low as ₹500 as a lump-sum contribution. Once investors place a redemption request before the cut off time, they get money back on the next day. Ultra-short-term funds invest their money in debt and money market instruments where the portfolio duration is between 3 and 6 months and there is low volatility and chance of a mark to market loss, if investors come with a 3-month horizon.
