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Hope all well, here is a second version of short term debt investment idea considering the ongoing scenario.

With the continuing covid times right from first wave, monetary authority is taking steps to decrease the interest rates in a gradual manner to push up demand and provide liquidity. There had been a minor pull in the state of the economy and business activities and the initiation of the second wave led to further disaster but business activities were in a better position to resist and accordingly effects were not devastating as it were there in the first wave of 2020.

Monetary authority were taking stance for having a constant rate since last reduction of upto 4%. But with the resistance economy along with a pull back had shown and recent inflation projections in the range of 5.5% to 6% there exists a chance of “U turn” in the interest rates in a gradual manner. Many debt fund managers are of the view that monetary authority is targeting for taking off excess liquidity from system and thus rate increase course is planned out in a gradual manner.

Short term Debt MF Opportunity in Liquid, Money Market and Ultra Short funds

Considering the above scenario, SBI (largest PSU Bank) had already started gradual marginal increase in interest rates on their deposits. With a gradual increase in the rate of interest projected, there exists an opportunity for short term debt investors who are looking to invest their short term and contingency funds in Money Market and Ultra Short Term Funds which had historically proven to deliver the returns over and above the Traditional Bank FDs in a Moderately low risk.

Between end of first wave and initiation of second wave (a duration of 3 to 4 months), due to pick up in business activity, we had seen a great pull in returns of Credit risk funds. Credit risk funds are the funds wherein portfolio consists of corporates with a rating of AA and below, thus there are chances of default in such securities. With a reviving economy where everything seems good and corporates are pulling back to normalcy, there are less chances of default in repayments and servicing thus leading to increase in such bond values and resulting into increase in value for MFs investing in such credit risk securities.


All above points said, What’s available for conservative investors who are targeting for products other than traditional Bank FDs over a short period of time?

Money Market and Ultra Short Term funds are Debt Market Mutual Funds that invest in short term high graded debt securities. With the gradual increase in interest rates projected by the monetary authority, floating rates are staged to increase in a parallel manner. Favourable impact of this would be seen initially in short term debt instruments which are short term accruals focused. Long Term rates are a composition of multiple short duration rates. Considering this, long term rates are also staged to increase not immediately but definitely. A simple concept of bond valuation states that there exists an inverse relationship between interest rates and value of bond (viz: increase in interest rates leads to decrease in bond value and vice versa). Hence, long duration funds are expected to decrease in valuation as we see an increase in interest rates over a long period of time.

What’s course of action is to be taken for short term debt investors? A conservative investor who is targeting a short term management of funds, money market and ultra short term funds can initiate a gradual investment in these category delivering return and security. For investors who are inclined towards traditional Bank FDs are also staged to benefit by making short term FDs over a period of 3 to 4 months and set to renewal after previous expiry to benefit from rising rates scenario. Long duration FDs are not recommended to prevent locking of funds at existing low rates. However, my view is to go with Money Market or Ultra Short Term funds considering the flexibility of withdrawal available vis a vis Bank FDs and moderately low risk.


Happy Investing

Disclaimer: The above view does not guarantee fixed return to investor but a mere strategy that can be applied by a rational person considering the ongoing scenario to reap the benefits in case of increase in interest rates by monetary authority.

References: Economic Times – Debt fund managers speak on latest RBI policy 6th August, 2021

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Category Corporate Law, Other Articles by - Govind Thumar