Mutual fund investors should stay with liquid plans for now

Investors looking to boost allocation to debt mutual funds must stick to liquid funds with bond yields set to rise in the wake of the government's higher capital expenditure target for FY23. Bond yields and prices move in opposite directions; when yields spike, prices fall and vice versa.

A decline in bond prices (rising yields) leads to mark-to-market losses in debt schemes, especially those investing in longer-duration securities. Liquid funds invest in bonds with shorter maturity and tend to be the least affected in such a scenario.

"Investors should invest in liquid funds now," said Amit Bivalkar, CEO, Sapient Wealth Management. "In the next 2-6 months, they will get an opportunity to lock into longer-tenure products at higher yields."

Bond yields rose by 15-20 basis points with the 10-year benchmark touching 6.88% on Tuesday after the budget. Fund managers expect yields to advance further.

"With the fiscal deficit higher for next year at 6.4%, it has led to a spike in bond yields," said Mahendra Jajoo, CIO - fixed income, Mirae Asset Management. "Near-term yields could touch the 7%-mark. Investors should stay in liquid funds."

Liquid funds have returned 3.24% in the past year, according to data from Value Research.