Liquid funds score over FDs, could offer 5-5.25% post repo hike, even more later

Mumbai: Financial planners believe investors could use liquid funds for their short term needs where they could potentially earn as high as 5-5.25% after the central bank raised policy rates by 50 basis points Friday.

Fund managers expect more rate increases and, hence, believe conservative investors would be better off in liquid funds.

“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. A hike in interest rates could lead to mark-to-market losses in longer tenure funds.

Many investors had shunned liquid funds and preferred savings bank deposits in the recent past due to poor returns but fund managers believe it’s time to come back.

“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% 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 returns were just 2.5-3%. Many HNIs started leaving money in the savings bank account itself.

and savings bank account pays 3% for deposits less than ₹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 data from industry body AMFI, 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 ₹3.8 lakh crore to ₹4.05 lakh crore in the same period.

“Investors with a shorter investment horizon and low-risk appetite should stick to liquid funds,” says Pankaj Pathak, fund manager, Quantum Mutual Fund. Pathak believes investors should select schemes that own government securities and do not invest in private sector companies which carry lower liquidity and higher risk of capital loss in case of default.

Many rich investors use these schemes as a parking ground to earn extra returns while they slowly stagger their entry into stocks or mutual funds in a volatile market. Many corporates park money here for liquidity needs, while retail investors use these to meet their short-term goals or as an emergency kitty.

Liquid funds are considered very safe in the debt mutual fund category. They 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.

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