CRR hike – where to invest

In the last article we read about RBI credit policy. We say that it does impact us. Now let us take one case CRR. What is CRR? CRR is Cash Reserve Ratio. It tells the banks what percentage of its deposit should be parked with the central bank. A few days back, the RBI announced that the CRR has been increased.

So what will happen because of this? It will reduce the liquidity in the market. What would happen now is persons and companies taking loans have to fight for the reduced balance of liquidity. So slowly the interest rates will start to rise. Though banks at present are saying it will not have an impact.

So what should I do to increase my returns? What are my options? Let us look at some of them.

Fixed Deposits: With liquidity becoming less and demand still being there, banks will want more deposits to make more money, so bank interest rates will rise.

Short and medium term debt funds: These funds look attractive with interest rates poised to move up. These funds have low risks and if you are ready to keep your funds in fixed deposits of up to a year, then these funds would make sense. Getting your money out is also easy. But unlike banks it would take from 3 to 7 days to get your money back. Also there is no lock in period. But note that withdrawal before a year will attract short term capital gains.

Fixed maturity plans: If you are ready to lock in your money for up to 2 years, these funds would give you attractive returns.

Medium to long-term funds: Long term debt funds give good returns and they are quite safe. But there would be an element of risk depending on how the interest rates move. The capital would be safe; the risk would be interest rate risk.

Equity funds: The last quarter results from most of the corporate were good, even with so much uncertainty in the economy. With the market following, this would be a good entry point. Note that mutual fund investments are for long term, so don’t start crying if the markets fall. Look at a horizon of 3 to 5 years. Note that with interest rates going up the borrowing costs of companies will go up, this will put pressure on their profits.

The Budget will also influence the market. So the question is, is this the right time or should I wait for the budget. Note that you are not investing in the stock market, as a long term investor, don’t try to time the market. It will only increase your anxiety.

A point to note, please check the fund house’s track record while investing, as ensuring the safety of your capital is more important than the possibility of making money.