The Reserve Bank of India’s move to raise key interest rates seems to have

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attracted short-term investors to money market funds, expecting an increase in bond yields.

Money managers recommend liquid funds as they tend to provide higher returns when interest rates move up. Liquid funds invest in securities with maturities up to 91 days. These include commercial papers and certificates of deposit, treasury bills and call money. These funds aim to provide easy liquidity, preservation of capital and moderate income.

Sudip Bandyopadhyay, president of global financial services at Spice Group, said, “In the forthcoming monetary policy, we believe the central bank is going to further raise rates. To take advantage, liquid funds are the better bet for a risk-averse investor.”

Dhirendra Kumar, chief executive officer of Value Research, said, “Liquid funds are completely isolated from interest rate movements. There is no sign of negative return in your portfolio and as interest rates go up, these funds tend to give higher returns.”

According to Value Research data, ultra short-term liquid funds such as Escort Liquid, Sahara Liquid Variable, Fortis Overnight Regular and LICMF Liquid have posted annual returns of around 6.04 per cent, 5.58 per cent, 5.51 per cent and 5.01 per cent, respectively. These returns will go up in the coming months if interest rates rise.

Ultra short-term bonds can be ideal for low-risk investors with shorter investment horizon looking beyond bank deposits.

“Short-term bond funds make sense for low-risk traditional fixed income investors. These funds will offer you a smooth exit when you want and still earn you healthy risk-adjusted returns,” said D K Aggarwal, head of wealth management at SMC Capital.