CRR hike and investments in Mutual Funds

Investment in Debt oriented Mutual Funds

Today’s hike in CRR will not impact bond market much, so debt funds too will not be affected much. Presented below is the investment strategy an investor can follow while investing in different kinds of debt/income based funds:

Liquid Funds:An investor with less than 6 months investment horizon may look at investing in liquid funds which may generate steady returns going forward and the returns could also possibly improve.

Income and Gilt Funds: On long term funds, an investor needs to stay put for more than 1 year. Is the right time to enter in : “long term yields are more dependent on the government borrowing programme to be announced in the budget, so only post budget it will be appropriate to take a call whether to enter in or not”.

With spiraling inflation, possibilities of rate hike in next credit policy and possibilities of fiscal measures by Government and uncertainties over borrowing programme of Government for next financial year may keep the long term rates volatile in short term.

Short Term Debt Funds: On short term funds – funds that invest with an average maturity of one to two years - “in March we may see a gradual increase in short term interest rates, so better to stay away from these funds.” Any increase in interest rates causes a fall in the market prices of debt paper and consequently the NAV of a fund.

Fixed Maturity Plans: With so much uncertainty, an investor may feel safe if he invests in fixed maturity plans and holds it till maturity. FMPs may act as the best bet to tide over short term uncertainties. Typically, FMPs hold their investments till the end of the scheme tenure, thereby cutting interest rate risk in the intervening period.