The Lowdown on the RBI's Move and Its Effect on Short-to-Medium Duration Debt Funds 💸
Decrease in CRR sparks increased interest in short-term investment funds
GC individual contributor
Embrace the RBI's latest move as they drop the repo rate by a whopping 50 basis points, diving it down to 5.50%, and slash the Cash Reserve Ratio (CRR) by a jaw-dropping 100 basis points, setting it at 3%. But what does all this mean for short-to-mid-duration debt funds? Let's dive in! 🏊♀️
No more worries about liquidity, thanks to Marzban Irani, CIO of fixed income at LIC Mutual Fund, who recommends diving into funds with a tenure spanning from 3 months to 3 years to catch the CRR cut wave. The surprising CRR cut is projected to unleash a colossal liquidity of Rs 2.5 lakh crore, boosting these funds' returns. 💸💰
Tata Asset Management's Amit Somani acknowledges this liquidity-boosting move, which, when announced favorably in the current market, might result in a 25-50 basis point reduction in short-term yields 📉. Siddharth Chaudhary, head of fixed income at Bajaj Finserv AMC, chimes in with the expectation that short-to-medium-term bonds will thrive, bolstered by an anticipated substantial liquidity surplus following the CRR cut. "Core liquidity surplus now stands tall at around Rs 8 lakh crore." 📈
However, with market expectations edging towards the terminal rate, some signs of profit booking lurk within the ranks of longer-term bonds. Axis Mutual Fund's report points to an altered market sentiment as any further rate action is now unlikely in the upcoming reviews 🚫. Yet, the central bank's dividend has already amplified core/durable liquidity, they note. "The gigantic liquidity surplus in the banking system augurs well for the short end of the curve, which, in our view, will harden over the ensuing six months." Axis MF predicts 10-year yields to trade within a range of 6%– 6.40%. 📉
Debt-oriented funds have witnessed skyrocketing net inflows in April, recording Rs 2.19 lakh crore compared to a humble Rs 24,269.26 crore in equity-oriented schemes 📈. Krishna Appala, fund manager at Capitalmind PMS, weighs in with the revelation that debt mutual funds have provided impressive returns over the past year, and falling rates might pose a challenge to fixed deposit yields 📉.
brace for changing market dynamics, as the low-interest-rate environment means lower returns for debt fund investors. Keep your eyes peeled for alternative investments opportunities, but remember, they might come with a higher risk factor 😕.
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- Stocks in the banking sector may see positive growth due to the increased liquidity in the market following the RBI's CRR cut.
- For personal-finance management, investing in short-to-medium duration debt funds can be a wise decision, given the expected boost in their returns due to the liquidity influx.
- The lower interest rates might lead to a decrease in dividend yields for traditional investments like fixed deposits, making it essential to explore other investment avenues, but be mindful of the associated risks.
- In the world of finance, the current market environment favors short-term investments, such as short-to-medium duration debt funds, which are predicted to harden over the ensuing six months.
- The Defi (Decentralized Finance) sector might not be directly influenced by the RBI's move, but it could offer alternative investment opportunities with higher risks, making it worth considering for those seeking to diversify their investing portfolio.
