Investors in liquid funds are likely to make net asset value gains as the RBI has cut the MSF rate by 75 basis points. Liquid and short-term funds invest a part of their portfolio in short-maturities and the rate cut is likely to see these funds make bond price gains. A cut in interest rates leads to an improvement in the price of debt holdings. The benefit, however, will only be for existing investors.
Market watchers say that the gains will be marginal as liquid funds hold debt that matures in 15-35 days or thereabouts. Short-term bond funds that hold very liquid treasury paper are also set to make some net asset value gains. As the rates were high in the shorter end of the yield curve, investors who parked their money in these debt papers in the earlier months will gain the most.
However, new investors from now on will have to contend with lower returns as the cut in interest rates will ease the pressure on the short-end of the yield curve for banks. Returns on similar tenure paper in the short-term get re-aligned to the lower rates in the coming weeks. Returns for liquid funds going forward is expected to be around 9.2-9.4%, according to experts.
Liquid funds returned as high as 10.5% per annum last month. Short-term debt funds, on the other hand, are also expected to see lower yields going forward.
Experts say that liquid funds still make a good investment as opposed to keeping your money idle in a savings bank account. Returns are higher than a savings bank account rates of around 3.5-6%, depending on which bank you invest in. Liquid fund managers can boost returns by investing in slightly higher maturity paper of around 3 months.
But lately, fund managers have been keeping a lower maturity profile and more secure assets given that the short-term rates ruled higher. On July 15, the RBI had hiked the MSF rate to 10.5%.
