Liquid fund returns crash. Where should you invest now? | Economic Times

Mutual fund investors with a low risk appetite are an anxious lot these days. From bank bank fixed deposits to liquid and over night funds, all the investment vehicles are offering low returns. In the last one year liquid funds which are among the favorites of shirt term investors have offered 3.15% and overnight funds have offered 3.01% returns. This is comparable to the bank FD rates at the moment. Debt market participants believe that liquid and overnight funds remain good choices but investors can look at options. "We have been saying this since the start of the year that, investors should acknowledge that the best of bond market rally is now behind us. At this time it would be prudent to lower the return expectations from fixed income products– as money market yields, fixed deposits rates will remain low and potential capital gains from long bond funds will be muted," says Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund.Mutual fund category3-month returns (%)1-year returns (%)3-year returns (%)Overnight Funds0.78 3.014.44Liquid Funds0.803.155.16Arbitrage Funds1.093.234.76Floater Funds1.466.007.65Dynamic Bond Funds1.484.777.63 Mutual fund advisors believe that low interest rates and rising inflation might result in a rate cycle reversal which may adversely affect the value of debt funds. "It would be prudent to allocate money into arbitrage funds for better tax efficiency or Target Maturity products (roll down strategy of one to two years). A point to be noted is that, one should not come looking for higher or great returns but only to balance the overall portfolio risk," says Shefali Satsangee, Founder, Funds Veeda'a, a mutual fund advisory firm, based in Agra. Financial planners as well as mutual fund managers believe that investors should look for alternatives in the debt fund space but not expect great returns. They also say that investors should not lose perspective of their risk appetite in wanting higher returns in their portfolio. "Investors could look at floating rate funds with lower average maturities (1 year or so), low duration, Ultra Short Term funds etc. Having said that, I would stay, stick to AAA and sovereign portfolios. All floating rates are not similar and one has to stick to ones with lower maturities. In any case, return expectations from debt should be tempered in the next 1-2 years. Corporate Bond with lower maturities can also be an option for those with slightly longer investment horizon, but I would not suggest going for hybrid or riskier funds. If interest rate spikes happen, the ones with longer maturity will suffer," says Subir Jha, Founder, Buckspeak, a wealth management firm, based in Hyderabad. Pankaj Pathak suggests that investors with higher risk appetite and longer holding period can consider dynamic bond funds where the fund manager has flexibility to change the portfolio when market view changes. "These funds are best suited for long-term fixed income allocation goals. However, do remember that bond funds are not fixed deposits and their returns could be highly volatile and even negative in short period of time. Conservative investors can remain invested in categories like liquid fund where impact of interest rate rise would be favorable. However, while selecting a liquid fund be cautious of the credit quality and liquidity of the underlying portfolio."