Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

FMPs: Waiting for RBI's decision in July

A lot of fixed maturity plans have been opened up as new fund offers in the recent past. Investors are being told to invest, as the return now reaches a salivating 11% (indicative) for a year’s tenure.

But remember a simple funda: Inflation is 11.89%. That is just the current figure – as we’ve seen, the past data has been dramatically adjusted upward later, nowadays literally every revision is 1% higher – so 11.89% could actually be 13%.

Given that, and given that inflation is increasing every week, we need to target returns of 15% or more. To fight inflation, RBI will need to tighten, meaning removing liquidity and increasing the cost of funds by raising interest rates. Even for the near future, the next RBI meet in July end will likely involve moves to tighten. Which then should increase yields going forward – meaning that compared to 11% today, in all likelihood, FMPs will be indicating 12% or more in August.

So wait till the RBI July meet before taking on a term commitment like an FMP.

For now I’d suggest short term liquid funds or debt funds. And in August if possible take up only FMPs for a 9 month tenure if possible (as rates are likely to increase further).

When we reach 16 to 17% yields I would find long term government bonds attractive. (or funds that hold them) A 10 year bond will attractive, not for long term investment, but because I expect interest rates to fall back below 10% within 10 years, and the falling yield will raise prices of these bonds dramatically in the interim.

  • px says:

    >Arent some st debt funds giving negative returns thanks to the fall in bond prices?
    Even st debt funds r shifting to the money mkts where returns are between 8 and 9%

  • Vishal Sardesai says:

    >Hi Deepak, Couple of queries..

    Could you help explain what is the impact of higher interest rates on Liquid fund returns. As the interest rates rise, do the liquid fund gains?

    Secondly, how do one invest in FMP’s and Bonds if one is ICICI direct subscriber.