Short-term debt funds to be in limelight

Short-term debt schemes like liquid, liquid plus, and fixed maturity schemes is likely to remain the most preferred investment avenue following the hike in repo rates by the Reserve Bank of India Wednesday, fund managers said.

Last Wednesday, the central bank hiked repo rates by 25 basis points to 7.5 per cent in its third quarter policy review. The governor left other key rates""Bank Rate, reverse repo rate, and cash reserve ratio""unchanged at 6 per cent, 6 per cent, and 5.5 per cent, respectively.

Fund managers expect inter-bank liquidity to tighten and are o the view rates on short-term papers are likely to inch up.

Balasubramanian, chief investment officer of Birla Sun Life Mutual, said, "Short-term rates would be tight. If inflation is pegged at 5.0-5.5 per cent, some more liquidity tightening in terms of hike in CRR (cash reserve ratio) is expected in near future."

The rise in rates on short-term debt securities will help short-term funds to offer annual returns in 7.5-9 per cent range, fund managers said. In the year until Thursday, liquid funds category gave 6.5 per cent average return.

Top performing schemes such as LICMF Liquid, HDFC Cash Management Savings, and UTI Money Market Mutual Fund recorded 7.26 per cent, 6.93 per cent, and 6.92 per cent returns, respectively.

Balasubramanian, chief investment officer of Birla Sun Life Mutual, said, "Short-term schemes, largely fixed maturity plans, would be in focus and may offer 7.5-8.0 per cent kind of return."

Fixed maturity plans have been in limelight as these schemes offer indicative returns by locking-in investments in high-yielding debt securities.

Ganti Murthy, fund manager at SBI Mutual, said, "The yields on short-term papers are good. Short-term plans would be the ideal choice. We are now having inverted yield curve. Short-term debt securities of one-two year tenure are offering 8.5-9 per cent yield. In such a scenario, short-term funds should offer 8.5 per cent kind of return."