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Benefiting From The Hike

This interest rate hike will benefit short-term bond fund investors, says Dhirendra Kumar, in an ET Now interview

Earlier today, the Reserve Bank of India (RBI) hiked interest rates again. Now, while that might hurt your loans, Dhirendra Kumar, in an interview to ET Now, talks about what the interest rate hike could mean to mutual fund investors.

In this kind of a rising interest rate scenario, does it make sense for investors to get into debt funds in order to reap higher returns?

No, that may not be a good idea because your long-term money could be invested in equity. Interest rate hikes hurt only long-term bond funds, and Indian investors have kept away from them. Most investors’ money is dominantly invested in short-term funds, liquid funds, and FMPs. These funds will be key beneficiaries of the rate hike. Today, the returns on liquid funds and short-term funds look very attractive. And it could possibly be the best time to invest in FMPs for higher returns as well as tax benefits. I also expect the returns on short-term debt funds to improve further.

Dhirendra, if I take the clock back, those who have invested in fixed deposits have managed to beat any other instrument in the last three years. What are the chances that in the next three years, blue chip schemes will outperform?
If we believe in reversion to mean, I think equity is going to do well in coming years. But, the point is that there are always a large set of investors who don’t invest in equity. They are fixed income investors who park their idle money in fixed income funds, corporate treasury, and they will be key beneficiaries of the rate hike. We might be getting close to a peak, for the good time to start for bond funds in the future.

About beating blue chip funds? I am hopeful that equities will perform to a superior vehicle in the next three years.

Which are the best liquid funds and how does one pick and choose the best one?
No, you don’t need any guidance. Just look at the fund you are most comfortable with, with the name and the kind of banking affiliation it has, because it is very commoditized by the market. The returns between the best liquid fund and the worst liquid fund could vary, the difference could be 25 basis points, and that also is not predictable. The way liquid funds are designed is that everybody has to invest in securities not exceeding 90 days that makes them a safe and commoditized value to my recommendation.

Savings rate has been deregulated, does it make sense to leave one’s money in the bank account or does it make sense to invest, especially in a high inflation scenario?
I believe that interest rates going up on savings bank accounts is a good thing. But at the same time, investors should use savings accounts for money in transit; the money in savings accounts should not be treated as an investment. From an investment point of view, liquid funds could be the more superior option.

Liquid funds have traditionally seen little interest from retail investors. Why is that? And why does it make sense for a small investor to invest in a liquid fund?
Liquid funds give higher returns than savings accounts. They don’t go down on value, and they allow investors to earn returns on idle cash. However, that said, a compromise on liquidity does not justify a liquid fund investment.

What is a systematic transfer plan (STP) and is it a good option in a market like this?
An STP is programmed investing. You put your money in a fixed income fund and move it gradually and regularly to an equity fund. An STP can help investors move into equity methodically.

There is a barrage of fixed maturity plans in the market. Does it make sense for investors to invest into such products? Will they benefit from the rate hike as well?
As I mentioned earlier, I think this could be the best time to invest in FMPs. FMPs have been the flavour for the last one year, they give largely predictable returns. And with the interest rates going up, FMPs will generate higher returns in the coming days. However, existing FMP investors will not benefit from this because of the lock-in. overall, FMPs are good options for investors with a fixed time frame, especially since they are more tax efficient than fixed deposits.