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Why are liquid funds not performing well? Should I hold them or withdraw and invest in FDs?

Ashutosh Gupta discusses the case for liquid funds in the current environment.

Why are liquid funds not performing? Should I hold my investment in liquid funds or withdraw and invest in FDs?
- Nikunj Jalan

Liquid funds are not yielding as much returns as they used to until the recent past because the interest rates have fallen substantially. The interest rates or the yields, particularly over the very near-term bonds, are fairly depressed these days. Therefore, while till recently they were able to offer meaningfully higher returns than a savings bank account, in the recent past, that margin has dropped substantially. These days, they are yielding by and large similar to what a bank account would fetch. That is the way debt markets are these days.

Now coming to his second question, I'd say that if he has more than one year of investment horizon which he likely has because he's talking about shifting this money to a fixed deposit, then I'd say that liquid funds are not a suitable category of funds anyways. In that case, he should look to move this money to short-duration funds which can yield better returns. Over a timeframe of two to three years, short-duration funds can also yield potentially better returns than what an FD can fetch. So, perhaps, short-duration funds would be a better category of funds for him to look at.

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