India is a “bright spot” in the global economy and a key contributor to global growth, backed by reforms (as observed by the IMF). Recognising the long-term growth prospects, the investment flows into India continue to remain strong.<\/p>\n\n\n\n

Having said that, considering 2024 will be an election year, geopolitical tensions are looming, equity markets are at an all-time high (valuations appear stretched), and there are chances of super El Nino weather conditions next year, it would be meaningful to take a short-term view (of 3 years or so) and invest suitably portion of your portion in certain sub-categories of debt mutual funds that are less risky.<\/p>\n\n\n\n

“Be fearful when others are greedy, and greedy when others are fearful.”<\/em> – Warren Buffett.<\/p>\n\n\n\n

Ever since the U.S. Federal signalled that policy interest rates may be cut next year, the 10-year G-sec yield has softened a bit.<\/p>\n\n\n\n

Graph 1: 10-year G-sec Yield Curve<\/em><\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

Data as of December 18, 2023
(Source: Investing.com, data collated by PersonalFN Research) <\/p>\n\n\n\n

Since April this year, the benchmark 10-year yield is down by 16 basis points (bps) as of December 18, 2023. As you may be aware, interest rates and yields have a positive correlation to one another.<\/p>\n\n\n\n

Currently, interest rates are elevated in most developed and developing economies. In the fight to curb inflation, central banks may keep interest rates for longer, observes the IMF. The World Bank President, Ajay Bagga, has opined that interest rates staying higher for longer — which he believes they will — could complicate investment across the world.<\/p>\n\n\n\n

The path to interest rates is hinged on the inflation trajectory. If the inflation CPI reading moderates, central banks, including the RBI, may be nudged to lower the policy interest rates. And as a result, the benchmark G-sec yield would soften further.<\/p>\n\n\n\n

Currently, the following sub-categories of debt mutual funds would be appropriate choices:<\/p>\n\n\n\n

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   Liquid Funds-<\/strong> For an investment time horizon of a couple of months to a year, Liquid Funds<\/a> can be an ideal choice.<\/p>\n\n\t

   Liquid Funds are open-ended debt mutual funds that primarily invest in short-term money market instruments with a maturity of up to 91 days.<\/p>\n\n\t

   Typically, Liquid Funds invest in money market instruments such as Certificate of Deposits (CDs), Commercial Papers (CPs), Term Deposits, Call Money, Treasury Bills, and so on.<\/p>\n\n\t

   Given the type of securities Liquid Funds hold, usually they entail low risk. They usually prioritise safety and liquidity over return.<\/p>\n\n\t

   The interest rate and credit risk are relatively low compared to the other sub-categories of debt funds.<\/p>\n\n\t

   The investment objective of a Liquid Fund is capital preservation and ensuring liquidity through judicious investments in the money market and debt instruments. It benchmarks its performance against the Crisil Liquid Debt Index and\/or Crisil 1-year T-bill Index.<\/p>\n\n\t

   But keep in mind there is some element of risk. It cannot be assumed that Liquid Funds are absolutely risk-free. If a Liquid Fund invests in debt papers of private issuers and compromises on quality to generate slightly better returns, the risk could be elevated. Ideally, a Liquid Fund should not engage in yield hunting to generate higher returns.<\/p>\n\n\t

   Hence, you need to be careful when selecting Liquid Funds. Don’t just consider the past or historical returns as they are in no way indicative of future performance. Likewise, avoid going by shallow mutual fund star ratings that give emphasis only to quantitative aspects. Instead, pay attention to portfolio characteristics, the investment ideologies at the fund house, the risk mitigation framework, and a host of other qualitative and quantitative aspects.<\/p>\n\n\t

   Want to know the three best Liquid Funds for 2024? Watch this video:<\/p>\n\n\t