HNIs Invest in Ultra Short Term MFs

 

Ultra short-term bond schemes by mutual funds are in vogue among savvy investors these days as firming money market rates due to tight liquidity have boosted returns. This category has given an annualised return of 8.4% over the last fortnight, and fund managers expect rates to firm up over the next few days.

 

HNIs looking to optimise returns and avoid volatility around the Budget are using ultra short-term funds.

 

Over the last fortnight, 1-year certificate of deposit (CD) rates have risen 30 basis points to around 8.85%.Wealth managers said rich investors who partly booked profits in equities before the Union Budget this Saturday are parking their money in these ultra short term bond schemes.

According to fund managers, money market rates typically peak out in February and March, and then come down in the new financial year as liquidity improves. Corporates and individuals withdraw funds to pay year-end taxes that lower liquidity, leading to a spurt in short-term rates.

Given the duration of the fund, investors could earn anywhere between 9-11%, for a timeframe of 45 days to 90 days.

As the year ends and the new financial year sets in, liquidity will improve as government spending will set in the new financial year. In addition, demand for credit during first quarter of the financial year is low and deposit growth outpaces credit growth. This helps in easing system liquidity during this period.

Ultra short-term funds will generate higher accrual income from elevated money market rates and also generate capital appreciation once money market rates start falling, said fund managers The government is running huge surplus in its account with RBI. The surplus will only shore up further owing to government raising over Rs 250 billion (cash inflow as part payment) through spectrum auctions, stake sales of PSUs and advance tax collections in March. On the other hand the government will curtail spending to keep fiscal deficit in check at 4.1% of GDP given that deficit has already crossed 100% of budget as of December 2014.

 

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