Invest in short-term funds, FD investors can wait

In the Third Quarter Review of Monetary Policy, the Reserve Bank of India (RBI) surprised the market by hiking the cash reserve ratio (CRR) by 75 basis points. “We were expecting a 50 basis point hike in the CRR,” said Nilesh Shah, CEO, ICICI Prudential Mutual Fund.

Though the CRR hike is going to suck out Rs 36,000 crore from the banking system, market experts felt that interest rates may not rise immediately. However, there are worries that the CRR hike will coincide with outflows in mid-March due to tax outgo resulting in some pressure on interest rates.

For investors in debt funds, investing in the short end of the curve will be ideal. “Debt fund investors should look at short-term bond funds because they will get re-priced,” said A Balasubramaniam, CEO, Birla Sun Life Mutual Fund. Short-term bond funds invest in paper with average maturity of one to two years. These funds are earning returns of 6-6.5 per cent, at present.

For investors, who are looking at fixed deposits or company deposits, Shah suggested that waiting till March would be a good idea. “The government’s borrowing programme would have a bigger impact on interest rates,” added Shah.

Returns from liquid-plus funds, rechristened as ultra-short term funds, may also improve. They invest in papers of 90 days to one year. Experts advise that staying away from medium- and long-term debt funds till things improve.

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Tags: Fixed Deposit, Personal Finance Tips, short term fd

Category: Personal Finance