If you are looking for short-term opportunities in the beaten-down debt market, which resulted in yields across debt instruments moving northward, then HDFC FMP 371D July 13 (1) can be a good option at this point.
Here’s why you can benefit from the timely launch of this fund:
– The fund seeks to invest 95-100% in certificates of deposits (CD) with high rating. 1-year CD rates closed at 10.28% on July 16, when the debt markets plummeted. To put that it perspective, it was 8.32% just a day before the fall (July 15). Closing rates as of Wednesday (July 17) was 10.18%. Of course, there is no guarantee that the fund will lock into these rates.
But if the fund manages to invest in CDs over the course of next week, after the FMP closes, it is likely to get instruments at good yields close to the above levels. That would make for attractive rates when compared with what a retail fixed deposit from bank fetches currently.
– While the debt market is likely to remain volatile over the course of the next few months, the instruments in an FMP are held to maturity. That means they hardly carry any interest rate risk, the way open-ended debt funds do. At the end of the tenure, the underlying instruments provide the coupon income.
– Given that it is a 371-day FMP, this will fetch indexation benefits as well.
But you will do well to make note of the following before opting for the FMP:
– You are willing to lock money for a year (FMPs are not liquid like open-end debt fund)
– You are willing to take marginally higher risks than bank deposits
– You have a requirement for the money at the end of the year or think you can redeploy them in other avenues after a year. This point is noteworthy, as a year later you may actually face a reinvestment risk. In other words, you may have to settle for much lower rates in the debt space than you would get in this fund. Hence if you are building a portfolio of long-term wealth, this may not be the best of options.