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Rates on these Short Term Mutual Funds may remain high as RBI is in no hurry to cut rates  

Mutual fund managers say investors looking for stable and higher returns should invest in short-term debt funds, which have outperformed equity markets in the last one year by delivering returns of over 10% against 7.73% offered by the benchmark Sensex.

Investors can expect superior returns from short-term debt funds in 2014, they said, arguing that interest rates on short-term papers are expected to remain on the higher side as the Reserve Bank of India (RBI) is in no hurry to cut rates.

The short-term debt funds are less volatile in nature compared to long-term debt funds, hence, investors should continue their investments in short-term debt funds. Over the next six months, we do not expect any interest rate cuts by RBI.

Fund houses expect RBI to continue its anti-inflationary stance after the wholesale inflation (WPI) for November climbed to a 14-month high of 7.52%, sparking fears of at least a 25 basis points repo rate hike by the central bank at its credit policy meet on Wednesday. Earlier, consumer inflation (CPI) for November had jumped to a nine-month high of 11.24%.

If RBI raises the key policy rate on Wednesday by 25 basis points, it would be the third consecutive hike of 0.25%, which would challenge India’s economic growth.
The inflation levels are above RBI’s comfort zone, and we do not expect any rate cut to happen in the medium term.

This suggests that investors will continue to concentrate on shorter-duration funds, where returns are higher and stable.

Short-term debt fund schemes invest in certificate of deposits (CDs), where the rates are hovering between 8.50% and 8.70%, and commercial papers (CPs) and bonds with less than oneyear maturity, where rates are 9.00% to 11.00%.

Fund managers are expecting liquidity to remain tight over the next couple of quarters, which will add pressure on interest rates, as many are expecting the US Federal Reserve to start tapering its stimulus programme sooner rather than later.

According to a survey by news agency Bloomberg, 34% of the economists polled believe that the Federal Reserve will give a go-ahead to tapering at its two-day meet beginning Tuesday, up from 17% in the November survey. The US central bank is currently buying bonds worth $85 billion a month to spur economic growth. Fund managers said an investor looking for low-risk attractive yield investment, spreading over a year or beyond, can invest in fixed maturity plans of debt products, where the returns are usually higher than the many prevailing debt products.

They said investors in FMPs with maturity of one year and above can avail benefits of indexation, which can bring down the tax impact significantly.

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