Dhirendra Kumar highlights the reasons why liquid funds and short-duration funds are a possible replacement for fixed deposits
I have my investments in fixed deposits. With interest rates falling to as low as 5 per cent and is likely to decrease further if RBI further decreases the repo rate again. I wish to take my money out from fixed deposits and invest it in either dollars or mutual funds. Which one would be a safer option?
As the dollar price has been increasing, I have also thought about buying dollars and keeping them at home. However, after careful consideration, I believe this would not get you desired returns. Rupee depreciation provided by dollars is not more than 4-5 per cent annualised if considered for a long duration. Also, unlike fixed deposits that guarantee you a return of 5 per cent every year, dollar price does not necessarily increase by about 5 per cent every year.
I agree with you that interest rates have been falling and may fall even more. However, irrespective of the fact that a further fall will take place in interest rates, I believe that one should invest their money in options that can be easily liquidated as and when required.
You can go for liquid funds or short-duration funds as they can fetch you somewhat better returns than fixed deposits and are highly liquid. However, if the repo rate falls, these funds will also deliver lower returns.