Should You Consider Debt Mutual Funds as Interest Rates Drop?

RBI rate cuts have created quite a buzz in the Indian financial system. The investors now get to earn less from fixed deposits and savings account, and hence now seek alternate options to prevent loss of funds from lower interest rates. Shifting funds to debt mutual funds can be a suitable solution. Read for details.

Interest Rates Drop – Repo Rate Cut by the Reserve Bank of India

This February, the RBI announced repo rate cut three times, leading to the repo rate lowered by a total of 100 basis points. The repo rate thus stands from 6.5 per cent to 5.5 per cent now. And this took less than 6 months. The consecutive rate cuts happened in meetings during February, April and June.

Consequences of Repo Rate Cuts

As a result of the above-mentioned repo rates, commercial banks also went ahead by following suit and reducing interest rates on fixed deposits as well as savings accounts. This has now left investors to instead search for alternate options where they can make investments without lowering their earnings from them.

Debt Mutual Funds – The Alternate Solution

Debt mutual funds are the talk of town, as investors now look forward to spending in corporate bonds, money market funds, liquid funds, etc. which all form types of debt mutual funds.

Experts have also suggested that these options are actually some of the viable options left. With FDs and savings accounts becoming less attractive, investors now look for other ways to investment for safety as well as returns. Money market funds and liquid funds might be the feasible alternatives now, as they help invest in short-term securities that are high in quality and that offer enough safety as well as liquidity.

Surplus funds can thus be parked and you will not have to lose quick funds.

Bond prices are expected to rise with decline in interest rates.

Money market mutual funds come with slightly higher returns also. This is because they allow the allocation of funds to short-term instruments. The yields are comparatively higher when compared to short-term FDs as well as savings accounts. Hence, they prove to be better options to take care of the short-term financial needs of individuals. Thus, money market funds especially help when emergency funds are to be managed or when it is about the management of temporary cash needs in a safe manner.

Let us see what the various debt mutual funds are, which you can study and invest in to prevent losing due to lowered rates on FDs and savings accounts.

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Various Debt Mutual Funds (MFs)

Below are the debt mutual funds from which you prefer the best one to make investment in, after ditching Fixed Deposits and Savings Bank Accounts due to the enhanced repo rates by the RBI and the resulting lowered interest rates.

Liquid Mutual Funds: This type of mutual funds includes debt and money market securities. However, the maturity is up to 91 days only. The category comes with 39 schemes where the total assets worth Rs.5.42 lakh crore are managed.

Money Market Funds: This type of mutual funds involves investing in money market instruments that come with a maturity of up to a year. Again, this category comes with 25 schemes where the total assets managed are worth up to Rs.3.37 lakh crore.

Corporate Bond Fund: Here, there are schemes comprising of at least 80% investment in corporate bonds, but only in AA+ and above this rate of corporate bonds. The schemes calculate to 21 in this category with total assets managed amounting to Rs.2.05 lakh crore.

All the above three instruments vary when it comes to the specific features and applications. It is dependent on your investment horizon as to which debt mutual fund you should choose to invest in.

The horizon being short, a few days to 3 months, liquid funds can be chosen for their liquidity and safety standards.

Don't miss this! "RBI Keeps the Repo Rate Unchanged and You Should Make the Most of It"

When you are seeking higher returns for a longer period (3 months to a year), your solution might be money market funds.

Similarly, the corporate bonds could be your go-to solution, when the investment has to be made for 2 to 3 years, and 1-2 % higher than FD rates of interest are expected.

Comparison Table for 3 Types of Debt Mutual Fund

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