Why is increasing interest rates good news for liquid funds? Should you invest?

March is important for liquid funds, and liquidity reduces with short-term rates increasing.

 good news for investors

Portfolio returns in liquid funds are high due to increased interest rates. Liquid funds are a good investment option for parking cash in the short term, considering bank FD rates are still low. In the financial system, March is important for liquid funds, and liquidity reduces with short-term rates increasing. 

Here is why it is good news for investors! 

Read: Best liquid mutual funds in India. Should you invest?

Attractive Returns

Liquid schemes' YTM (Yield-To-Maturity) has increased in the last year, and ACE MF says that the average liquid fund YTM as of January 31, 2023, was 6.82%. The number was 3.67% a year before that. After expense ratio adjustment, these yields provide an idea of the investor's expected returns. The higher the number, the better it is. Liquid funds park money in market securities that mature before 91 days. It ensures that the portfolio frequently matures, and the fund manager can redeploy it. Liquid funds mostly do well as interest rates rise. The RBI has increased the repo rate to 6.5% since May 2022. 

Low Risk & Higher Returns

Investors use liquid funds to invest for the short term. Leaving the money in the savings account can get a 3% return. However, liquid funds can offer over 6%, making them an attractive option. Very short-term fixed deposit rates are still the same and have not been hiked. 

Mahendra Kumar Jajoo of Mirae Asset Investment Managers (India) suggests that liquid funds will stay strong because the central banks still show upward movement in the interest rates. He believes that even if there is no increase in policy rates, it will take time to bring them down, making liquid funds a rewarding option. 

Also ReadGet at least 2% more return than bank FDs with liquid funds. This is how! 

While liquid funds offer higher returns than other investment options, the risk factor stays low. Generally, liquid funds invest in high credit-rating money markets instruments like certificates of deposit or commercial paper. The fund focuses on maintaining the portfolio's liquidity. 


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