As interest rates fall, investing in money market funds is more rewarding than keeping money in savings or fixed deposits. Murthy Nagarajan, head, Fixed Income, Tata Mutual Fund, tells Saikat Neogi that it is smarter for investors to lock in higher yields through money market funds, as they offer both accrual income and capital gains. Excerpts:
As interest rates are likely to fall, should investors consider money market funds now?
As the RBI is expected to cut the repo rate over the next three policy meetings, banks are likely to reduce deposit rates further. In this environment, it’s smarter for investors to lock in higher yields through money market funds, as they offer both accrual income and capital gains. This makes them more rewarding than keeping money in savings or fixed deposits, which are subject to repricing.
As banks are reducing interest rates on savings accounts, are liquid funds for better short-term returns with low risk?
Liquid funds park money in short-term papers having a residual maturity of up to 91 days. Their returns typically hover around the repo rate plus about 20 basis points (bps). With banks reducing the deposit rates due to the current liquidity overhang in the system, overnight rates are now trading below the repo rate of 6%, largely because of excess liquidity of around `2 lakh crore.
Liquid funds are currently offering relatively better returns than what banks are providing on deposits of up to one year. However, they carry higher risk than bank deposits. They also offer greater flexibility, with the option to withdraw money on short notice. This makes them a choice to consider parking of funds for the short-term, especially for investors looking to enhance their returns with relatively moderate to low to moderate risk, depending upon investments made by the scheme.
As liquidity conditions ease, should investors look at duration products like corporate bond funds?
Given that India’s growth is expected to remain above 6%, corporate bond funds are good additions to the portfolio. Over the past five years, Indian corporates have strengthened their balance sheets on the back of strong profitability and buoyancy in capital markets. Currently, corporate bonds offer a spread of 60-80 bps over similar government securities, allowing investors to benefit from both a fall in interest rates and
spread compression.
Inflows in debt mutual funds were at a record high in April. Does it signal that investors sought lower-risk options to ride out the market volatility and rebalance their portfolios?
Last month, we saw positive inflows in debt mutual funds, driven by multiple factors such as government spending, open market purchases of government securities worth `80,000 crore, the seasonal slowdown in credit demand, and money returning to the banking system. With surplus cash on hand, both banks and corporations parked funds in mutual funds. Besides, investors made tactical moves into duration products to take advantage of the expected rate cuts and easy liquidity conditions.
How favourable is it for investors to put money in long-duration funds now?
There’s an expectation of up to 75 bps of further cuts in interest rates in the coming months, with inflation projected to remain around or below 4%. In such a scenario, the 10-year government bond yield could move below 6%. This makes long-duration funds an attractive option for investors looking to benefit from a decline in interest rates.
Why are investors favouring arbitrage funds over equity schemes?
Arbitrage and hybrid strategies have gained popularity as investors are looking for options that blend the relative stability of debt with the tax efficiency and flexibility of equity-linked products. In the current environment where
debt yields are attractive and equity markets remain volatile, a hybrid strategy may offer potentially better post-tax returns compared to traditional debt funds.