Fund managers recommend short-term funds, FMPs

It’s not the time for retail investors to look at long-term funds as interest rates are still volatile, opine fund managers.

Depending on their investment horizon, investors should instead look at short-term funds, fixed maturity plans (FMPs), liquid funds and liquid plus funds, they feel.

Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund, said this is the time to put money in short-term funds or at the most medium-term funds depending upon individual risk appetite.

Long duration funds will come back in vogue when there is stability in the economy and things get under control, he said.

While all fund managers recommend short-term funds, some are also recommending liquid and liquid plus funds.

Short-term funds are open-ended schemes which seek to generate returns by investing in a diversified portfolio of debt and money market securities. The greatest advantage of these funds over FMPs is that they are open ended, which gives the fund manager the flexibility to invest according to the view on interest rates.

“We have been positive on short-term bond funds for the last five to six months. The reason being even though the Reserve Bank of India has been hiking rates, the pressure on short-end rates specifically one-year bank certificate of deposits does not seem to be there anymore,” said Suyash Choudhary, head of fixed income, IDFC Mutual Fund.

But if the investment horizon is below six months then one should also look at liquid funds or liquid plus funds, they suggest.

Liquid funds and liquid plus funds invest in money market instruments of shorter duration. “If you want to put in money for about a month or two months, then you should consider liquid or liquid plus funds,” said Srivastava.

Similarly, according to Lakshmi Iyer, head of fixed income, Kotak Mutual Fund, investors should lock in some investments in FMPs which are of one year and beyond. This will be good for investors who do not want too much risk.

“If an investor does not need the money for next two years, then he should do a close to 60-70% investment in FMPs and balance should be in short-term bond funds. And if the investment horizon is under one year then you should look at close to 60-70% in short-term funds and the balance in FMPs,” said Iyer.

According to Iyer, FMPs will help the investors mitigate interest rate risks as it tends to give a reasonably good cushion to an investor’s portfolio in an event when rates hikes continue relentlessly, which is contrary to all fund managers view.