Mumbai: Many investors preferred saving bank deposits over liquid funds due to poor returns the latter offered in the recent past but with RBI
raising policy rates, prospects are looking brighter for investors looking to park money in liquid funds.
Investors could use liquid funds for their short-term needs where they could potentially earn as high as 5 percent to 5. 25 percent after the central bank raised policy rates by 50 basis points, ET reported, citing financial planners.
Fund managers expect more rate increases and, hence, believe conservative investors would be better off in liquid funds, the report said.
“We expect another 50-bps rate hike by MPC
over the next couple of meetings before the pause,” says Akhil Mittal, senior fund manager-fixed income at Tata Mutual Fund
, as per the report. A hike in interest rates could lead to mark-to market losses in longer tenure funds.
Banks have not raised savings bank rates or deposit rates. Liquid funds are a better option as investors can earn close to what repo rate offers,” says Sandeep Bagla, chief executive officer, Trust Mutual Fund
. “Currently repo rates stand at 5. 4 percent and given that we are in a rising interest rate environment, they could move up by another 50 basis points during the financial year. So these returns could get even better.”
Financial planners believe investors can earn more than savings bank accounts. In the recent past, investors were disappointed with liquid funds leading to withdrawals from such schemes as re- turns were just 2. 5-3 percent. Many HNIs started leaving money in the savings bank account itself. HDFC Bank
and ICICI Bank
savings bank account pays 3 percent for deposits less than Rs 50 lakh.
There is an opportunity to earn an extra 200 basis points in liquid funds over savings bank accounts, with high safety, says Abhay Mathure, a Mumbai-based mutual fund distributor.
As per AMFI data, folios in liquid funds fell from 2. 141 million in July 2021 to 1. 75 million in June 2022, even though AUM rose marginally from Rs 3. 8 lakh crore to Rs 4. 05 lakh crore in the same period.
Liquid funds are considered very safe in the debt mutual fund category. These funds have a lower duration maturity as they invest only in T Bills, commercial paper and money market securities with maturity of up to 91 days only, and are least affected by movement of interest rates.