ultra short-term funds: Use ultra short-term funds to stay liquid, ride rate hikes – Blue Barrows

Mumbai: Financial planners believe investors should allocate money to a mix of liquid and ultra short-term funds where they can earn up to 6.5%, potentially 50-200 basis points more than fixed deposits of similar tenure. Given that the RBI has kept the policy stance unchanged and global inflation continues to be high, fund managers believe the door is open for more rate hikes, which could hurt investors in long-duration funds

“Inflation is not showing any signs of stopping here. As long as it does not come down, rates could go further up,” said Sandeep Bagla, chief executive of Trust AMC.

Many fund managers believe there are more hikes likely as globally, inflation continues to be a problem for central banks and the Fed is likely to raise rates even further. To protect its currency and make flows attractive, the RBI too would have to hike rates.

Use Ultra Short-term Funds to Stay Liquid, Ride Rate Hikes

“Aggressive monetary tightening in the advanced economies will continue to weigh on domestic monetary policy. It would be difficult for the RBI to soften its stance in such a hostile global environment,” said Pankaj Pathak, fund manager-fixed income at Quantum Mutual Fund. Pathak expects short-term money market rates will move higher along with the policy repo rate and hence feels conservative investors are better off in liquid funds.

Due to their low maturity, there are low chances of suffering mark-to-market (MTM)loss in liquid and ultra short-term funds. While liquid funds have a portfolio of securities with maturities up to 91 days, ultra short-term funds have maturities between three and six months. In case of a rate hike, the MTM loss in a 10-year bond is far higher than a short tenure paper.

Banks have lagged in raising deposit rates and given this scenario, ultra short-term and liquid funds will fetch investors 150-200 basis points more than comparable bank deposits.

For instance, short-tenure bank deposits of, six months fetch pre-tax returns of 4.5-4.65%.