The Covid-19 pandemic has made people realise the importance of building an emergency fund to deal with possible medical emergencies, salary cuts or job losses. Since the fund can be needed any time, it is usually invested in fixed rate instruments so that the returns can be known with certainty.
However, sharp interest rate cuts by the Reserve Bank of India (RBI) to combat economic slowdown have impacted returns of most fixed income investments. The widely popular liquid funds, too, have been hit. Some investment experts recommend arbitrage funds as an alternative to liquid funds. These funds buy shares in the cash market and sell an equal number of shares in the futures market, making money from the price difference between the two markets. Since the equity positions are fully hedged, market risk is largely eliminated. Can they be a substitute for liquid funds and other debt instruments such as bank fixed deposits (FDs)?
The Best Bet
Liquid funds and arbitrage funds are used to park money for the short term. Both have returned less than 3 per cent on a trailing basis in the past one year. Cumulative rate cuts of 250 basis points (1 basis point = 1/100th of a per cent) by the RBI since February 2019 have hurt returns from liquid schemes. In 2019, they had returned 6.33 per cent on an average. In 2020, this fell to 4 per cent.
This story is from the August 08, 2021 edition of Business Today.
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This story is from the August 08, 2021 edition of Business Today.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
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