Pathak said investors with shorter investment horizons and low-risk appetite should stick with liquid funds. “Rate hike and continued reduction in durable liquidity surplus is positive for short-term debt fund categories like the liquid fund. We would expect further improvement in the return potential of these categories as interest accrual on short-term debt instruments has risen meaningfully,” he said.
Pathak said since the interest rate on bank saving accounts are not likely to increase quickly while the returns from the liquid fund are already seeing an increase, investing in liquid funds looks more attractive for your surplus funds.
Investors with a short-term investment horizon and with little desire to take risks should invest in liquid funds which 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, said Pathak.
We continue to expect the bond yields to come down over the medium term with improvement in external and fiscal balances and falling inflation. In the near term, yields may remain in a tight range with 10-year Gsec trading between 7.2%-7.5%, said Pathak.
Given the fact that much of the rate hikes are already delivered and the starting yields on bonds are between 7.3%-7.5%, bond funds are likely to perform better over the coming 2-3 years, added Pathak.
He said that given a sharp jump in headline CPI inflation, the bond market is now pricing for another 25 basis points of a rate hike by the RBI in the April MPC meeting. In the last 10 months, the repo rate has been hiked by a cumulative 250 basis points and the short-term money market rates have moved up by over 300 basis points. The full impact of these measures is yet to be seen, he said.
