Mutual Fund houses are redirecting their funds towards investments in short term plans while keeping their focus mainly on the liquid assets. The reasons as to why short term funds are in the lime light is because of the rate hikes proposed by RBI and also because of the uncertainty in the long run due to the instability in macroeconomic variables like inflation rates, rupee value etc. Since, volatility can be expected in the short term market sightings, investors can gain by investing in the medium term funds. Medium term fund plans generally constitute a 1-3 year time frame, where you can benefit from the rate of returns by opting to invest using the Systematic Investment Plans (SIPs).
It was considered ‘healthy’ to invest a major portion of your savings in equities and a part of it in debt, but sighting the current market movements, equities are currently highly volatile in nature. With the unpredictable international economic conditions, coupled with high inflation scare and an increase in the fiscal deficit, investing in long term debt assets like government securities, bonds, Certificate of Deposits (COD), retail non convertible debentures and debt papers of NBFCs are considered. Most financial advisors believe that if the growth of the Indian economy continues to slowdown, then the idea of disinvestment is going to be quite difficult. Therefore, long term funds are better left to think about in future and should not be considered for investing at present. This is advised since, as an investor you should benefit from your portfolio in future. Try to invest in such a way that not only you are able to combat inflation in the coming 10-15 years, also, there should not be a necessity for you to opt for a debt like a personal loan or home loan in future to finance a part of your requirements. Therefore, in order to avoid any short run uncertainties and by staying away, for some time, from the long term securities, medium term investments are best advised. Investing your funds for a tenor of 1-3 years can enable you to enjoy risk adjusted returns.
Fund managers in India are closely analyzing the US Treasury bond after losing the status of a strong valued AAA status as the world largest economy by Standard & Poor’s credit rating agency. Although it might not create a significant impact, it will affect the global market. This is possible since, most clearing houses with an AAA rating, are based in the US currently. The downgrade can create an impact on their ratings as well. Other issuers who depend on the US sovereign rating may also have to face the brunt of the downgrade. In short, in the short run, the effect on risk assets can be quite disturbing since they too are likely to be majorly affected by this downgrade.
With the RBI cutting down the exposure towards liquid schemes, banks have lost a major source of their liquidity. This cut down has not affected the Mutual Fund houses much but banks seem to have been affected by this move. It has been observed that with this move large cap funds have not been affected much because of their nature of being long term funds and the scale of such funds. But, when it comes to returns, small funds are sure to have outperformed the large funds. With the resistance of funds flowing into the small cap funds, it is definitely going to create an impact. The liquidity crunch will not affect the large cap funds is as stated earlier because of its large scale financial activity coupled with the fund size.